Building a Stockrank £100K Nap Portfolio?

2nd Jun '15 by iwright7

48 comments 24112 reads

I have watched with interest the impressive progress of Ed's 2015 Stockrank Nap portfolio created in January 2015. So 6 months later I have decided to take a Mid-year Nap plunge so will as cash allows, will put £100K of my portfolio into a purely factor based selection. Instead of pouring over financial ratios, company announcements and brokers forecasts for this part of my portfolio I am letting the screening do the thinking!

Part of my rationale is that the Thompson Reuters financial data (from which Stockranks are derived) is available to most city investment professionals. These city investors have the option of generating multi-configurable factor scores from this data and no doubt a proportion of them (such as Societe Generale) will invest in high factor scoring companies that the computer maths predict are either undervalued and/or have further gain. This is not following the herd because many of the high Stockrank type companies selected will be boring "also ran" stocks that the majority of investors (including me) by-pass. I am banking though that enough money goes into these high multi-factor scoring companies to push up their price over the medium term.

Under this rules based system I am selecting the 2 top Stockrank score companies that pass my screen in each main investment category. So 10 sectors gives me a total of 20 companies, which should be more than enough diversification. Because I am not in a position to put in £100K at once I am choosing one or several sectors from whichever sector(s) are missing from the portfolio and have highest Stockrank at the time. If no company from a particular sector meets the screened criteria then I will remain in cash until one does. This spreads the market entry somewhat and allows for new entries (or Stockrank upgrades) to fill sectors such as Utilities which don't often figure in the screened criteria.

In addition to the Stockrank score I have added an additional criteria because I am at heart I am a quality investor. I do believe that quality companies generally continue to be quality, whilst poor quality companies struggle to turn into quality. So for me an overlay with a Quality score of >80 is required, (thereby selecting companies in the top 20% by Quality). I also like to see positive momentum and value factors which the combined Stockrank…

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Rusty2

8th Jun '15

Yes it is. I have suggested some sort of warning on the Stockreport as some people don't realise.

Which begs another question are these companies high in the rankings because of a bid? Maybe some sort of warning on the Ranking, red star?

iwright7

28th Jul '15

A short update almost 3 months in. Three new rules have been added one based on Stocko blog suggestions and the others based on new stop loss and sector allocation rules.

New Rule Remove from the screening selection companies that are currently subject to a takeover bid, on basis that they are unlikely to rise further.

New Rule Sell at stop loss >15%

New Rule Change the 2 companies per sector weighting to more broadly reflect the actual Stockmarket % sector weighting.

The portfolio took a -5% loss over the first couple of months and is currently showing a £1K loss. The Wizz Q score dropped to 69 and was replaced with ZYT. Centramin and ALY passed the -15% stop loss and were sold. These sales were replaced with HAT and EMR, all with high SR and Q scores.

One thing I have noticed is that by screening for SR >90 and Quality >80 the average portfolio PE currently comes in at 15, which is above the market average of 14.3 PE. - You could argue that you should expect and need to pay a bit more for Quality and that is the case. I will stick with the Q >80 sub rule because knowing that the group Quality score is high makes me more relaxed about sticking with the Stocko mechanical screening choice.

After reading Howard Marks; "The Most Important Thing" I am hoping that high SR rules are more likely to select a bucket of shares whose "intrinsic value" is underestimated by the market. Over a period of time positive company results and trading updates should cause the share prices to correct and the group of shares to rise. Time will tell! Ian

Thanks for the update. Yes ALY has not been good, I have that in my Folio of NAPS. Down 20%. EMR is a good share, my best performing, what price did you buy it for? Do you have £100k invested now?

Herbie, Only swapped EMR this week so no gain on this one yet. Total input £80K and awaiting more funds! Will be interesting to see what the next 3 months brings and whether more results reflect the high scoring Stocko algorithms? I am optimistic they will, but find it very difficult to predict which of the high ranking shares will be the real winners? Ian

Ian, thanks. My Naps has been rather mixed, its about 2% up from start of June. I feel last January Naps was a better time, but time will tell. Mine is phathom folio but I do hold 8/20 was 9 but I sold ENTU.

Herbie,

One problem is that the FT100 in May way flat, whilst June/July has been bearish. Back in Jan to April the FT100 trend was bullish, so would have been easier back then. I too held/sold ENTU which I have an uneasy feeling about. Ian

Ian,
I don't think its the FT100 as most shares are smaller companies, 2014 was not a good year for small companies and 2015 has been much better. So end of 2014 there was more value about and some of the NAPS have done very well in 6 months. May-now has not been so good with Greece causing problems. I may be wrong but I can't see Naps/Snaps going up 29% by year end.

Nujinho

3rd Aug '15

Hi - I am brand new to this whole game (previously only invested in funds), so am very interested how to set the sell/rebalancing rules for my strategy.

Has anyone used trailing stop losses and/or moving averages?

p.s. sorry for the dumb question, but what are NAPS?

janebolacha

Naps are top selections, as in the term "nap" used in racing tips or in the expression "a nap hand".
They are seen (by the person choosing them) as the stock selections most likely to do well.

28th Dec '15

After a good bit of thought I have decided to bring my "Towards £100K" rules based Nap Stockrank portfolio to a close. Over the 6 month period some shares hit the 15% stop loss rule and were sold and other high QMV shares have replaced them. I will let the Nap portfolio winners run for a while, but will sell the also ran and reinvest their proceeds into my main pick portfolio. I know everyone will say that 6 months is not long enough and that Ed's 2015 Nap portfolio has been an outstanding success, but this style of investing is just not enjoyable enough for me.

A low/non intervention rules only portfolio doesn't suit my curious and impatient personality. I am a Quality and Momentum (QM) investor at heart and despite adding a Q >80 rule to my Stockrank Nap rules, sitting on a bunch of shares that aren't doing much doesn't cut it for me. I do like to see shares generally going up and am happy to cut those that don't.

As far as Stockranks are concerned there is definitely merit in many of the high Stockrank scoring companies and for example I like and hold Zytronic (LON:ZYT) . Each morning I look at the updated Q and M score Movers screens for companies with weekly double digit improvements taking them over the 90+threshold as new stock selection ideas.

In my main Growth portfolio the winners for 2015 have been Bioventix (LON:BVXP) (Big thanks Leon), accesso Technology (LON:ACSO) (Big thanks Paul), £TRAM, Tristel (LON:TSTL), Ab Dynamics (LON:ABDP), Tracsis (LON:TRCS). All have fairly modest Stockrank scores, but have done well for me. My biggest loser of 2015 was a stupid punt on Plus500 (LON:PLUS) which didn't fit my normal investing criteria.

As for 2016 my greatest new growth hope is for Burford Capital (LON:BUR). Burford operates in a interesting legal niche lending up front to corporate litigation funds to legal firms on a partial no win/no fee basis. Burford Capital (LON:BUR) latest reported deal is £20M+ to part fund the VW "Defeat Device" action, for which VW have admitted liability. Burford is a classic Momentum share with Quality attributes delivering 3 Earnings surprises in the last 2 years. Whilst the Stocko Quality score is only 52, it has most of the Quality attributes I look for: (ROCE =12, ROIC = 23, ROE =15). In addition the PER is <12 and a 3.3% Dividend so it's not bad Value either. Spirited CNBC video interview: http://www.burfordcapital.com/blog-burford-ceo-int...

Whatever your investing style good luck to you all in 2016. Ian

Novice Investor

sitting on a bunch of shares that aren't doing much doesn't cut it for me. I do like to see shares generally going up..

That reminds me of the Will Rogers quote:

Buy some good stock, hold it until it goes up, then sell it. If it don't go up, don't buy it.

NI

I tend to agree the last 6 months has not been so good for NAPS style investment, I think its partly due to the market which is about 7% down but also most of the stocks that are highly ranked are not that good value, there are no UK stocks that have 3 90 scores and very few that have 3 80s, as others have said its hard to find good value now. I did a dummy Naps in June its only 3% up, if I had done it 1 year ago it would probably be up 40%. I do hold about half of those shares you mention and yes they have done better than my Stockopedia selected ones, in fact quite a few of those have fallen down, like Entu (UK) (LON:ENTU), Fairpoint (LON:FRP), Amino Technologies (LON:AMO), U and I (LON:UAI) and Laura Ashley Holdings (LON:ALY).

Yes I agree about Burford Capital (LON:BUR), which I do hold.

One I have hopes for that seems undervalued is SMP, the TTM is totally different from the forecast for 2016. One of my shares Inland Homes (LON:INL) was always low around mid 40s on Stockopedia until the recent results, now I think its overvalued so I sold last week, I have my doubts about some type of companies on Stockopedia.

Herbie,

Do you know how many of Ed's 2015 Nap picks had 3x 90+ scores for QMV at inception - I think you may be right about fewer value/quality stocks now. Ian

Off hand no but I can roughly check.

OK on 8th January, 2015 which is a few days after the Naps was published, none had 3x 90 scores and only 2 had 3x 80s scores although Character (LON:CCT) was very close.

As has been repeated many times, it's as a group that the high stockranked companies do well. If you start trying to apply any further refinement, I think you'll not only find you won't have enough candidates for selection, but you'll also be making the error of assuming, for example, that a company with a stockrank of 99 is a better investment prospect than one with a stockrank of 95.

Clearly that is not the case.

NI

vik2001

29th Dec '15

interesting read. just my 2cents I think you added it to many of your own rules and also steered away from Eds simply listed criteria for the Naps. maybe selling if stockrank less than <90 and bps <250 wasn't a great refinement. also you added quality rank >80 as a further refinement.

Vik,

You could be right - It shouldn't be too difficult for one of the Stocko team to back test from January over the last 3 years to see what the range of 1 Year outcomes would have been?

For me though what I have discovered is that a purely mechanical selection system lacks the intellectual challenge - However I might be forced to change my view if Ed's 2015 NAP system consistently produced even a 1/3rd (14%/annum) of the 2015 outcome. From a previous posting I believe Herbie has followed Ed's Nap rules since mid-year - Maybe he or Ed would like to comment?

Cheers,

Ian

But I think that is the point, a purely mechanical system can out perform a more intellectual selection, Ed did an article about it earlier this year. There is no reason why you can't do a NAPS portfolio and do your own selections as well, you can just reduce the NAPS amount invested. Yes I do run a dummy Naps from June this year, although I do own about half those shares, its about +4% up, Adept Telecom (LON:ADT) and Empresaria (LON:EMR) are both up over 50% and Indivior (LON:INDV) and Lamprell (LON:LAM) are the worst down 27% and 40% respectfully. Actually I would not have bought those 2 shares, so if you exclude them, it would be up 6.9% which not so bad considering the market but nothing like the original NAPS.

I agree timing of investment is important but I don't think months of the year are the factor, I think its more to do with the market. Its seems October 2014 - early this year was a good time, the last 6 months does not appear to be so good. Hopefully Ed will be updating the NAPS and SNAPS performances soon.

Herbie,

Thanks for your take on this.

The whole point with Ed's 2015 Naps is that it a mechanical system without human bias/intervention. I too lean towards a human bias choosing some companies from with the highest Stockrank scores and to take into consideration a company's most recent outlook, quality return numbers and 3-12 months momentum. I do think high Stockranks narrow down the field when looking for good value improving stocks. In recent times though my best returns have been from more expensive high growth companies in the 20-25 PER range. Ian

Building a Stockrank £100K Nap Portfolio?

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Iwright7

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