A Tale of Two Portfolios .....

Monday, Apr 11 2016 by
26

A newly joined subscriber to Stocko, I thought it would be an interesting exercise late last year to run in parallel two portfolios based on wholly different selection criteria. These were both assembled and valued at approximately the same time in mid to late December 2015. For better or worse I own all of the stocks mentioned, albeit in differing amounts to those used in these virtual portfolios.  As explained below, both portfolios were seeded with an initial £50,000 investment capital with the objective of making as high a return within 12 months as possible from Capital Gains.  (For the time being I have ignored dividends but will re-assess the possible impact they would have had at the end of the period).

Portfolio 1 - Naps Portfolio

Portfolio 1 is a NAPs portfolio chosen by picking 25 diverse stocks with high the highest available stock rankings in their industry sector. The original portfolio was outlined in a posting on December 15th, 2015 which for ease of reference I’ve cut and pasted an extract from here.

“The portfolio consists of 25 stocks with an initial gross investment of £2,000 each (i.e. pre dealing costs). Notwithstanding my better intentions of assembling the stocks over 3 months to spread the risk of a market sell off, (which is exactly what happened), I am now fully invested with all stocks purchased. These are all UK LSE/AIM listed and meet the general criteria of having a dealing spread of less than 5% and a market cap of more than £15 million. The portfolio currently consists of:-

Cambria Automobiles (LON:CAMB); Character (LON:CCT); Dart (LON:DTG); H & T (LON:HAT); Hydro International (LON:HYD); NWF (LON:NWF); Empresaria (LON:EMR); Inland Homes (LON:INL); Wizz Air Holdings (LON:WIZZ); Computacenter (LON:CCC); Headlam (LON:HEAD); Journey (LON:JNY); Somero Enterprises Inc (LON:SOM); Berkeley Group (LON:BKG);

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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Optibiotix Health Plc is a life sciences company developing a range of products to modify the human microbiome. The Company's principal activity is research and development into microbiome modulators. It operates in UK segment. The Company has a pipeline of microbiome modulators that can impact on lipid and cholesterol management, energy harvest and appetite suppression. The development pipeline is operated by its OptiScreen and OptiBiotic platform technologies designed to identify metabolic pathways and compounds that impact on human physiology. Its Optiscreen is a screening and optimization technology platform designed to identify microbes within the human microbiome with metabolic pathways, which can interact with human physiological processes. Its OptiBiotic is a platform technology, which generates compounds and screens them for their ability to modulate the human microbiome and its microbial end products. Its platforms are applicable across a range of other human diseases. more »

LSE Price
67.02p
Change
-3.6%
Mkt Cap (£m)
59.4
P/E (fwd)
n/a
Yield (fwd)
n/a

Glencore plc is an integrated producer and marketer of commodities, such as metals and minerals, energy products, agricultural products and Corporate and other. The Metals and minerals segment is engaged in copper, zinc/lead, nickel, ferroalloys, alumina/aluminum and iron ore production and marketing. It also has interests in industrial assets that include mining, smelting, refining and warehousing operations. Its Energy products segment includes coal mining and oil production operations and investments in strategic handling, storage and freight equipment and facilities. Its Agricultural products segment is supported by controlled and non-controlled storage, handling and processing facilities in various locations, and is focused on grains, oils/oilseeds, cotton and sugar. Its diversified operations consist of over 150 mining and metallurgical, oil production and agricultural assets. more »

LSE Price
231p
Change
0.9%
Mkt Cap (£m)
31,069
P/E (fwd)
9.4
Yield (fwd)
6.3

Pantheon Resources PLC is a United Kingdom-based oil and gas exploration company. The Company is principally engaged in investing in oil and gas exploration and development. The Company operates in two business segments: USA and Head Office. The Company holds working interest in approximately five prospects in Tyler and Polk Counties, East Texas where the Company has drilled over two exploration wells. The Company's Tyler County is located in East Texas near the border with Louisiana. The Company's Polk County is located to the immediate West of Tyler County. The primary target of both wells is the Woodbine/Eagle Ford sandstone formation. The secondary target is the Austin Chalk, which exists on the Tyler County prospects. The Company operates in the United Kingdom through its parent undertaking and in the United States through subsidiary companies. The Company's subsidiaries include Hadrian Oil & Gas LLC, Agrippa LLC and Pantheon Oil & Gas LP. more »

LSE Price
18.36p
Change
-1.8%
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94.0
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n/a
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n/a



  Is LON:OPTI fundamentally strong or weak? Find out More »


9 Posts on this Thread show/hide all

Nick Ray 12th Apr '16 1 of 9
3

It's an good example of the difference between quality rank and value rank. The first portfolio has a fairly high quality rank overall and that results in lower volatility (less extreme swings) and a mean return which mirrors the market average, but will probably slightly out-perform it when the mean market return is greater than zero.

The second portfolio tends to have lower quality rank but much higher value rank. As a result it has high volatility and the mean return tends not to correlate so closely with the market. The trouble with high-value-rank (under-valued) stocks is that they tend to either recover dramatically or confirm the implied expectation and get even worse.

2016 has been a good year so far for high-value-rank portfolios but over longer time-frames (one year or more) I don't think high-value-rank stocks perform as well as high-quality-rank stocks and the extra volatility can be stressful.

It does raise an interesting question about the wisdom of combining quality rank and value rank (and momentum rank) into a single stock rank though. I would argue that doing this blunts the benefit of each considered separately. The low volatility of quality rank stocks gets blunted by trying to include a bit of value, and the possibility of finding a wildly successful value stock is blunted because often such stocks will have very low quality rank.

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herbie47 12th Apr '16 2 of 9

Similar experience to me, although I started a bit earlier than you around June last year, a few of my Stockopedia ones have gone right down, such as U and I (LON:UAI), Amino Technologies (LON:AMO), Laura Ashley Holdings (LON:ALY), Entu (UK) (LON:ENTU), a few useful gains from Hydro International (LON:HYD), Empresaria (LON:EMR), although my largest gains have come mostly from lower ranked shares such as Metal Tiger (LON:MTR), Castleton Technology (LON:CTP), Boohoo.Com (LON:BOO), Trakm8 Holdings (LON:TRAK). To be fair Ab Dynamics (LON:ABDP) has done really well but I had that before I joined Stockopedia.

I set up 3 dummy NAPS in Dec 2015:

Standard Naps is breakeven.

Value Naps (as above but exclude shares with VR below 70) is up 2.5%

Top Naps (just take the top 20 Stockopedia ranked shares over 10m cap, forget about sectors) is up 2%

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jimbobjames2002 12th Apr '16 3 of 9
2

Hi Gus, great to see another OptiBiotix Health (LON:OPTI) holder out there! I know it's blue sky, but I'm personally very excited about this company. I've held since around 23p last February and the potential here is huge. I very much see them as food based rather than pharma based, meaning they are much closer to commercial viability IMO. A business with strong management, low cash burn and a genuine MOAT too. Now we just need some revenue!

Lots of JV partnerships and patents in areas such as weight loss, novel (healthy) sugars, skincare, woundcare and Cholesterol.

The recently released human study results showing a 36.7% drop in Cholesterol for those in the high Cholesterol range was particularly pleasing and hopefully a deal with a supposed ‘multi-national’ is imminent.

I’ve been thinking of writing an article on OptiBiotix Health (LON:OPTI) for a little while, but everytime I do yet more positive news seems to come through. I think I might wait until the (hopeful) MN deal is struck or at least until we get the company results.

OPTI is definitely a Special Situations stock for me too.

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gus 1065 12th Apr '16 4 of 9
1

In reply to post #127406

Hi Jimbo.

Thanks for the comments on OptiBiotix Health (LON:OPTI). I agree the pharma vs. food point is a very important distinction to make as it potentially short cuts the route to market for their new products, especially in the US. This would save a huge amount of time and money.

I think the news flow has been excellent so far this year, although we are still waiting on the mooted break through tie up with a big multi national. I gather there is an investor/analysts meeting this Thursday so maybe further news then.

It is still early days for the company and a material re-rating will require revenues and profits which are not yet there. At risk of ramping, however, if any one of their core sector products comes through the potential is huge. Imagine, a sugar substitute that achieves weight loss; a non-prescription, cholesterol reducing bacon sandwich etc.. Given they seem to have a number of irons in several fires, I am optimistic that one or more will come off. At that point I could also see them being snapped up by one of the global pharma/food producers.

I look forward to seeing your write up. Don't wait for the news to abate or you may never get around to writing it!

Best,

Gus.

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Richard Goodwin 12th Apr '16 5 of 9
2

I suspect one reason for strong outperformance is that many of the special situations  shared the same driver - sentiment towards commodity prices. On this basis I'd one does well they all do well hence massive gains. So the issue is not one of art vs science but science vs commodity pricing sentiments perhaps? 

Whatever the rights and wrongs of your post Gus, you write beautifully. Thx for the blog.

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gus 1065 12th Apr '16 6 of 9
1

In reply to post #127445

Hi Richard.

You are spot on with your comment about the commodity (and in particular Oil & Gas) bias in the Special Situations portfolio and the benefit of not only picking good stocks but also being in the right sector. Ideally, I should have included a gold stock such as Centamin (LON:CEY) in this portfolio too as this sector has also done very well first quarter. (I do hold that stock but not here). As ever, 50:50 hindsight makes it clear that buying into oil, metals and minerals in December/ January was just about perfect timing given the strong rise across most of the sector. If we were looking at the fourth quarter of 2015 (when I made several of my purchases) then the performance would have been completely different. Although I reported a 26% return above for the first quarter, several of the positions were already underwater when included here such that I was recovering lost ground rather than racking up profits.

There was also a little bit of the contrarian in taking a position on some of the marginal UK fashion retailers when market sentiment was driven by concerns about the impact of the mild winter. In aggregate these did quite well although some (Boohoo.Com (LON:BOO), French Connection (LON:FCCN) ) did better than others (Bonmarche Holdings (LON:BON) ). One of the benefits of taking a view on a general market trend and then positioning several composite trades is that the gains from the one or two winners more than offset the lack lustre performance of the also rans.

One grouping that didn't quite fire were the "recovery" stocks. With the exception of Home Retail (LON:HOME) that was the subject of a takeover bid, little to date has happened with DX (Group) (LON:DX.) and Premier Farnell (LON:PFL) , although both of their share prices have ticked up YTD. Still time for both of these to come good hopefully.

Thanks again for the feedback - and the compliment!

Best,

Gus.

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gus 1065 14th Jun '16 7 of 9
2

In reply to post #127457

Agreed bid just posted for Premier Farnell (LON:PFL) at 165p per share in cash plus current proposed 3.6p dividend by Datwyler.

Details in attached RNS.

http://www.investegate.co.uk/datwyler-holding-inc--dae-/rns/offer-for-premier-farnell-plc/201606140700110763B/

C.51% premium to yesterday's closing price.

Best,


Gus.

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smallcapman 14th Jun '16 8 of 9
2

I applaud your efforts Gus, but over the timescale you have chosen, any meaningful conclusion would be impossible. Even if superficially successful (i.e.over the short term) the frictional costs of turning over a portfolio so frequently would be quite significant over a few years.

I've seen a few efforts at promoting the use of Stockranks in compiling a portfolio, but the construction of a comparative portfolio not using Stockranks is often referred to in mocking tones, and even with a derogatory name, as chosen here by yourself. While the sensible use of Stockranks over a suitable time period does seem to have some merit, there are other ways and they shouldn't be mocked.

Story stocks seems to be in vogue as the derogatory term used to describe those companies who have yet to produce acceptable metrics. That includes pretty much all of the small Oil and Gas exploration and Mining companies and perhaps quite a number of small fast growing companies.

I think what I'm trying to say, albeit perhaps, badly, is that there seems to be evidence of groupthink, and that, in my view, is never a good thing.

Scm

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gus 1065 14th Jun '16 9 of 9
1

Hi SCM,

Thanks for the feedback.

To be honest, I haven't reached any conclusions yet on the optimal investment style. The nature of my ( limited) experiment was to put up two different hypotheses for picking winners and the monitor their performance to see which, if either, offers better returns. The jury is very much still out.

While the out performance of the story stocks so far is pleasing, I suspect it is a short term phenomena that will reverse (although I have banked some profits and reduced some of the larger positions over the past few weeks). I suspect part of my pleasure is down to my contrarian anti-group think mentally whereby a £ gained by following the herd (in this case the Stock ranking fans) is somehow not as sweet as a £ earned by going against it.

One observation I would make at this point is that "group think" seems to be a very strong short term momentum factor (at the moment, it seems Brexit might happen after all so there is/will be a sell off so there is a self fulfilling sell off) whereas longer term group think seems to break down and different opinions take over. Hypothesis to test: investor opinion is a random walk such that over time group think on a particular issue dissipates and some kind of mean reversion takes over.

Best,

Gus.

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