New Year 'Naps' - Top 10 Stocks for 2015

Tuesday, Jan 06 2015 by
51
New Year Naps  Top 10 Stocks for 2015

When I first started subscribing to stock market tip sheets in the 1990's, the concept of New Year Naps" popped onto my radar. Many tip sheets would choose a handful of favoured stocks (naps) for the year in a special section of their January edition. I thought the phrase and practice was an odd idiosyncrasy until I started to spot racing tipsters and bookies refer to naps when considering racing certainties.

It seems that the origin of the phrase 'a nap hand' comes from the traditional English card game called Napoleon". In the game each player is dealt five cards and declares how many tricks they think they can make. A Nap Hand" is a declaration that you can take all 5 tricks - so it's only ever used when you've got very strong odds. I've never played or heard of the game Napoleon but apparently it used to be quite popular. The phrase 'nap hand' seems to have been adopted first into horse racing and from there eventually into the tip sheet tradition.

But we don't do tips…

Now, before we publish some Naps, we need to make some disclaimers. As most readers will know, the entire philosophy behind Stockopedia.com is not to 'tip' stocks. Why don't we tip? Firstly and most simply - we don't believe we need to. The history of stock market returns shows that simple rule-based stock picking models have been far more consistent and effective than human forecasts.

The history of human forecasting is riddled with failure. Left to our own biases, we tend to project what's just happened, so our forecasts often lag reality rather than predict the future. Those that want to read up on the appalling accuracy of human forecasting should read Sin 1 (the folly of forecasting) in James Montier's excellent Seven Sins of Fund Management.

In contrast, for the last 80 years or so since Ben Graham began his work on classic bargain investing strategies, simple checklist based approaches have been shown to be far more consistent at beating the market. Put simply, statistics trump stories in stock market strategies, and that's where we put our bets at Stockopedia.

More importantly, we believe everyone is capable of making their own investing decisions. Rather than mirroring the 'broadcast' approach that most financial publications take, our philosophy is to put the best possible tools…

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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. 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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Cranswick plc is a United Kingdom-based supplier of food products. The Company operates through Foods segment, which is engaged in the manufacture and supply of food products to the United Kingdom grocery retailers, the food service sector and other food producers. The Company provides a range of pork, gourmet sausages, cooked meats, cooked poultry, charcuterie, hand-cured and air-dried bacon and gourmet pastry products through retail, food servicing and manufacturing channels. The Company's brands include Bodega, Woodall's, Simply Sausages and Yorkshire Baker. The Company operates from 16 production facilities in the United Kingdom. The Company also owns its own pig breeding and rearing operations. It also owns chicken supply chain, including a feed mill, hatchery and broiler farms. From its Bury, the Company manufactures and distributes foods from Europe, using packaging formats and flavor combinations. more »

LSE Price
2576p
Change
1.1%
Mkt Cap (£m)
1,336
P/E (fwd)
17.5
Yield (fwd)
2.3

The Berkeley Group Holdings plc is a holding company. The Company, along with its subsidiaries, is engaged in residential-led, mixed-use property development. Its segments include Residential-led mixed-use development and Other activities. Its brands include Berkeley, which creates medium to large-scale developments in towns, cities and the countryside, encompassing executive homes, mixed use schemes, riverside apartments, refurbished historic buildings and urban loft spaces; St George, which is involved in mixed use sustainable regeneration in London; St James, which handles projects that embrace private residential development, commercial property, recreational and community facilities; St Edward, which offers residentially led developments, and St William. Berkeley First is a division of the Company specializing in student accommodation and mixed use residential development within London and the South East. Berkeley Commercial is its commercial property developer and investor. more »

LSE Price
3829p
Change
1.3%
Mkt Cap (£m)
4,823
P/E (fwd)
11.3
Yield (fwd)
5.4

Dart Group PLC is a leisure travel and distribution, and logistics company. The Company is engaged in the provision of air travel organizer licensing (ATOL) licensed package holidays by its tour operator, Jet2holidays Limited, and scheduled leisure flights by its airline, Jet2.com Limited (Jet2.com). It distributes temperature-controlled and ambient products on behalf of retailers, processors, growers and importers in the United Kingdom. It operates through two segments: Leisure Travel, and Distribution & Logistics. The Leisure Travel business focuses on scheduled leisure flights by Jet2.com to holiday destinations in the Mediterranean, the Canary Islands and to European Leisure Cities. The Distribution & Logistics business includes the operations of Fowler Welch-Coolchain Limited, a distribution and logistics services provider. Its temperature-controlled operations are in Spalding in Lincolnshire, Teynham and Paddock Wood in Kent, and Hilsea near Portsmouth. more »

LSE Price
721.5p
Change
1.7%
Mkt Cap (£m)
1,074
P/E (fwd)
8.8
Yield (fwd)
1.6



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


46 Comments on this Article show/hide all

pka 3rd Jan '15 7 of 46

Ed, Thanks for this interesting article, in which you wrote:

"Rule 3: Diversify - Select the single highest ranked stock from each sector
The very top 10 stocks by StockRank include 4 Consumer Cyclicals, 4 Industrials, 1 Financial and 1 Basic Materials stock. Only 4 sectors are represented out of 10 possible. Building a portfolio with such heavy weighting in single sectors can be highly risky - what if the economy tanks when you are loaded with cyclicals? There are 6 other Economic Sectors - Energy, Telecoms, Technology, Healthcare, Utilities and Consumer Defensives - and we thought it more interesting and prudent to cover the highest ranking share from each."

I constructed a 20-stock portfolio using the StockRanks three months ago. In order to diversify the portfolio, I used a rule that I would not select more than one stock from each 'Industry Group' (as defined by Stockopedia), because I did not notice the 'Sector' class in Stockopedia. There are a lot more possible Industry Groups (I estimated about 35) than the 10 possible Sectors. However, examining my portfolio now, I see that just 8 out of 10 Sectors are represented in the portfolio, and the number of stocks in each Sector range from 0 (for Telecoms and Uitlities) and 1 (for Energy and Healthcare), to 4 in Consumer Cylicals (in Industry Groups: Hotels & Entertainment Services, Speciality Retailers, Homebuilding & Construction Supplies, Media & Publishing) and 5 in Financials (in Industry Groups: Real Estate Operations, Insurance, Collective Investments, Investment Banking & Investment Services, Residential & Commercial REITs).

Do you think my portfolio is therefore less diversified than it could be?

If so, would it be better, for example, to use a rule (to construct a well-diversified 20-stock portfolio) that each stock must be from a different Industry Group but no more than 3 stocks can be selected from any one Sector?

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davidtalbo 3rd Jan '15 8 of 46
1

Hi Ed

An interesting article and an interesting choice of shares.

Using Stockopedia metrics, I have developed a more complicated mechanistic method of suggesting shares for investment, which reflects my statistical background. My method has served me well to date,, although I do further research before investment..


I start from roughly the same base as you, giving a share a score according to its Stockopedia stockrank (although, as an aside, I become more and more convinced I should be using the value/momentum rank rather than the stockrank).

I then include a score for each share, according to its current dividend. I know share buybacks add complications, but I believe the research of David Dreman and others, plus the investment experience of people like John Lee, suggest this is a useful addition.

I then add a score for qualification of some Stockopedia screens. However, this is not a linear score. High performing screens since inception have the largest scores. Screens which have underperformed the FTSE All Share since inception have a zero score, unless they have a negative return or are short screens, when they have a negative score..

Finally, I add a score according to which index a share belongs, and given the diversity of shares qualifying for AIM, I subdivide the AIM score into three parts

Obviously, my method is more complicated than yours,,so either I am overcomplicating matters, since your method works just as well, or I should be adding extra performance. Possibly, you should be hoping my method works better, or why include the stock screens in Stockopedia?

My choice of shares, using my mechanistic method, produces three top ten shares which also feature in your top ten shares, and ten shares which also feature in your top twenty shares.

For completeness, my system produces the following "naps":

Consumer Defensive.
1. Imperial Tobacco
2. Cranswick

Consumer Cyclical
1. Berkeley Group
2. Bellway

Industrial
1. Reed Elsevier
2. Galliford Try

Financials
1. Catlin
2. Cenkos Securities

Basic Materials
1. James Latham
2. Mondi

Technology
1. Indigovision
2. Newmark Security

Energy
1. Royal Dutch Shell B
2. Lamprell

Telecom
1. BT Telecom
2. Adept Telecom

Healthcare:
1. UDG Healthcare
2. Animalcare

Utility
1. Dee Valley
2. United Utilities.

Best wishes

David Talbot

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Paul Scott 3rd Jan '15 9 of 46
4

Hi,

Interesting article, thanks Ed.

As regards momentum, if you look at the US indices (which drive everything in the UK too), then it's been a continuous rising market, with occasional small corrections, since 2009. So that would greatly flatter momentum investing strategies in the last 5-6 years.

However, that's not going to last forever. Sooner or later there's going to be a change of trend, and momentum strategies will stop working. That will leave people who ignored valuation and instead bet on momentum, high & dry in a load of considerably over-valued stocks, which would be prime candidates to crash in price in a violent market correction.

My understanding is that the Stockopedia "momentum" calculation includes rising earnings estimates, which in my view is far more important than a rising share price. It would be interesting to know how the momentum score is calculated.

I have to say that in smaller caps, a lot of the highest scoring StockRank stocks are ones which fit nicely with my approach, so I do like this system.

On the other hand, the figures and screening systems only tell you so much. After all, Quindell (LON:QPP) scores very highly on the numbers alone, but it's been a disaster, as there were serious problems with management & the business model, which statistical systems wouldn't necessarily pick up.
Similarly, Cenkos Securities (LON:CNKS) had a one-off good year due to huge fees earned on the IPO of the AA.

So it's still vital to properly check out every company, but I find that starting with a decent quality/value/momentum shortlist of stocks saves a lot of time.

Regards, Paul.

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Sully8786 3rd Jan '15 10 of 46

In reply to post #89618

Hi Paul,

It's interesting that you've included Cenkos Securities (LON:CNKS) and Quindell (LON:QPP) in the same paragraph as they seem like their fortunes are rather tied at the moment with Cenkos being the last advisor standing for Quindell.

When I did my research on Cenkos I stripped out the profit from the AA so I could get a feel for what a normal year would look like - clearly, I didn't do enough research as I could have spotted that they advised Quindell - an expensive mistake!

Regards,

Sully.

Company: Dave Sullivan - Talking Stocks
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AlanJenkins2 3rd Jan '15 11 of 46

Joel Greenblatt's magic formula really loves Quindell :-]

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PhilH 3rd Jan '15 12 of 46
3

In reply to post #89618

Hi Paul,

Firstly StockRank isn't a momentum based approach, it's a hybrid - Quality, Value & Momentum based approach.

Sooner or later there's going to be a change of trend, and momentum strategies will stop working.

Of course stop losses will be triggered and portfolios will turn over to cash. It doesn't have to be the case that this occurs as a dramatic crash, but it could be. It could be that a momentum approach keeps you out of a bear market as opposed to a value investor who sees opportunities coming out of the woodwork.

Also a loss in momentum in stocks with a high StockRank doesn't necessarily mean you'll end up with overvalued stocks. In fact if you're selecting stock with 97+ StockRanks on the whole you'll be selecting high ValueRank stocks too.

As regards momentum, if you look at the US indices (which drive everything in the UK too), then it's been a continuous rising market, with occasional small corrections, since 2009. So that would greatly flatter momentum investing strategies in the last 5-6 years.

Well that only flatters momentum approaches if you think it will stop any time soon ... 5 years+ and counting.

If I'd told you in 2009 that the markets would go on a bull run for 6 years+ would you have used a momentum based approach? If the answer is No, then surely you've missed out on some major gains as you waited for stocks to correct and fall into traditional value territory. My own portfolio closely mirrors (in terms of holdings as opposed to value) my fantasy fund and has gone up by 56% in 23 months. Very early on in the establishment of this portfolio I switched to a QVM/QGM approach (heavily influenced by the Stockopedia research and The Naked Trader approach)

Who's to say that this market won't go on for another 5 - 6 years? Patience is the watch word of the value investor. The value investor knows best, has done the research, spotted the opportunity that the market has missed and is sure they have it right. They are so sure they even buy more stock when the price drops. Maybe my watch word is 'adapt'.

If the market conditions change, I'll look to adapt my strategy. Even if a catastrophic market event happens and wipes 30% off my portfolio I'd still be significantly ahead of most other private investors. Personally speaking even the growth shares I buy are cheap in terms of growth so I'd be very surprised to see 30% wiped off my portfolio.

With respect to Quindell, it's never popped up on my screens but I did take a 13% gain on a punt in the recent upetty/downy ride. However I did buy Let's Gowex SA (MCE:GOW) when it appeared on my screens and it did run into serious problems. That however was only after I bought and sold it again (when it lost price momentum) for a 166% profit. My point is in a diversified portfolio whilst attempting to avoid total losses with screening parameters:

1) a share that may well go under can still be bought and sold before the disaster strikes (of course I'm not looking to buy into companies that are headed this way but it happens)

2) even if the share did pan with a portfolio of 25 shares it isn't disastrous

Ultimately, you are a hunter whereas I'm a farmer and this plays into this statement too

So it's still vital to properly check out every company

The definition of "properly check out" is subjective. For me my screening rules help me to weed out the duffers as best I can and I read recent releases. I evaluate risk/reward by generating price targets and considering points of technical support. I know that this will be quite different to your definition of "properly check out", e.g. I rarely if ever look at the accounts (sacrilege to some I know) but rather I 'rely' on the Stockopedia metrics that drive my screens, e.g. P/S, Altman, Montier, EPS estimates, PEGR, etc.

I recognise that not all of my choices will work out and so I sell them at a loss, knowing that my other selections will (so far) in general do well. The exception to this selling strategy has been when there has been a market wide sell off. In this situation I tend to sit tight for a while, let the dust settle and give the winners a chance to recover.The ones that falter I sell and move on until they pop back up on my screens at some stage in the future. On average I hold for a year to 18m but this can be skewed by the relatively quick selling off stocks that falter.

I guess in this post I'm trying to offer an alternative to the Value only approach that requires detailed company research. I try to not get an emotional attachment to my stocks and I expect to get some wrong. I think in the Value approach there is a lot riding on one's evaluation of a company and as such the ego can become wedded to a selection. Each to their own I suppose.

Disclaimer, this is very much my own approach that I have developed it over time and it could be fluke, good fortune, market conditions, etc. etc. I'm no means an investing expert so there's my wealth warning. What I do say though is that I'm completely transparent in my selections which you can see in my fantasy portfolio. I'm passionate about providing a way for the every day Joe/Jo to manage their own financial future without needing to know the ins and outs of accounting principles and as such to me that doesn't sit well with a value based/hunter based approach whereas a farmer approach does.

Enough rambling.

Happy New Year and I hope you all enjoy a prosperous 2015

Phil

Professional Services: Sunflower Counselling
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dangersimpson 4th Jan '15 13 of 46
3

In reply to post #89592

Hi Phil,

QVM is preferable to QVGM because the academic research shows positive returns to Quality, Value and Momentum but negative to Growth. Any outperformance in the short term is probably just noise and a reflection of the market overpaying for some big name growth shares Ocado (LON:OCDO) etc. The returns to these factors need long term commitment - probably why they keep working. In all markets, shares, countries and time periods the market simply overpays for growth, on average, over the long term and leads to negative relative returns to growth.

Re: your choice of 97.5% cut-off i think this may be too tight - it implies a level of refinement that really doesnt exist. You may be better off widening your stock rank criteria and filtering out the likes of Quindell (LON:QPP) and Lets Gowex via Earnings quality or financial distress metrics e.g. Beneish M-Score and Altman Z-score to reduce your choices to the right level of shares. Since you like the purer quantive strategy the book 'Quantitive Value' would show the benefit of following this approach.

HTH,

Mark

Book: Excellent Investing: How to Build a Winning Portfolio
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lightningtiger 4th Jan '15 14 of 46

Excellent article, regarding sectors.
In the US nearly all the airline stocks have done extremely well in the last 2 or 3 months due to the oil price falling, LUV being one of them. However balancing that the rate of the $ to the £ has to be taken into account. From about $ 1.7 to now just over $1.5, which is about 8% in just a few short months.
I notice IDOX, which is right in my doorstep, so I will be keeping an eye on it.
The Stock Ranks do save a lot of time, & generally you do get a better chance with investing with them.
Dart Group was one of the first shares I bought with Stockopedia and has proven that very point. AHT is another which still looks good.

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PhilH 4th Jan '15 15 of 46

In reply to post #89628

Thanks Mark I appreciate your detailed response.

Professional Services: Sunflower Counselling
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Edward Croft 4th Jan '15 16 of 46
1

In reply to post #89592

I'd like to add a few comments on why QVM gained favour over QVGM. Initially (for a few months) we favoured a QVGM StockRank, but dropped the 'G' (Growth) for a number of reasons. It wasn't because QVGM as a model was underperforming (it wasn't at the time), but because there were strong reasons to ditch growth as a factor which we became convinced would make it underperform over time. This was a very tricky decision, partly because Growth is such a popular factor for stock picking, but I think it was the right one. It really boiled down to the following 4 key reasons.

1. Little Academic backing - As dangersimpson has mentioned, there's little academic research that backs up using "Growth" as a core factor in a long term stock selection model. Stocks that have high exposure to Sales and Earnings growth actually have a tendency to mean revert - i.e. past & forecast high growers don't continue to outperform - and often they underperform slower growers. This has been backed up by the raw returns to the GrowthRanks as evidenced in the chart below. The top 5 Growth deciles have all returned similar amounts => there's been little alpha for Growth stocks !

54a90043cdde9__Stockopedia.png

On the other hand the literature has long shownthat stocks exposed toValue and Momentum as factors tend to outperform, while a lot of the more recent literature is backing up the idea that Quality factors have some impact (especially low volatility / high profitability or blend approaches ) - indeed the top 10% of ranked stocks for each of Q, V and M have outperformed all other deciles to a far greater extent - none more so than Momentum stocks as shown below.

54a903b3d0a4f__Stockopedia.png

2. Correlation - In our analysis we found that the stocks exposed to Growth were highly correlated (similar) to those exposed to both Momentum and Quality. i.e. Growth wasn't adding any new information. What you really want is a set of uncorrelated factors as there should be higher risk adjusted returns. We found Quality and Momentum were somewhat correlated, but Value and Momentum were inversely correlated. Q, V & M were the best set of the 4.

3. Arithmetic - If the Value factor was 1 of 4 factors in our model, stocks would only have a 25% exposure to value. Value has long been one of the most powerful stock selection factors - portfolios of cheap stocks tend to outperform those of expensive stocks in almost every 5 year cycle. What was happening in the QVGM model was that much more expensive stocks were qualifying in the top ranked sets. In QVM, there's a 33% exposure to the Value effect. Many academic models seek higher exposure to Value, so we were more comfortable with a higher exposure to value.

4. Simplicity - I'd be lying if there weren't some other lesser, but still important motives for favouring QVM. A lot of our goals with the site (and ranks) are educational as well as alpha generating. QVM is simpler and more understandable, and a stronger educational framework. Also Quality in the academic literature often contains growth factors so there is scope for its extension.

There may be some portfolios of QVGM which have outperformed over the last couple of years - but there are many ways to skin a cat. From a top decile perspective the QVM portfolio has strongly outperformed QVGM. I'll publish those results in due course.

I'll answer the sector question a little later !

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Edward Croft 4th Jan '15 17 of 46
3

In reply to post #89610

On the subject of diversification...

I think it's important to say that this article isn't designed as an investment system. I've selected the top ranked stock from each sector to write about as it's a broader set of stocks and makes for a more interesting discussion. I could have selected a set of stocks that I personally believe have a higher probability for outperformance in 2015 - which would have been more concentrated in fewer sectors - but that would have skipped over some of the subjects we are now discussing - like diversification and risk. Important topics and I'm glad they've been brought them up.

We have been writing a lot of articles in recent months on the subject of risk, diversification and portfolio management which you can catch at this link. It is a complex topic and one that depends on one's personal portfolio size, time horizon and tax status. As a result there's really not a one shoe fits all approach here.

Equities obviously are only a single asset class among many. We love equities here but as a result this post can only cover the subject of diversifying within equities. The first thing anyone should do is ensure they are diversified away from equities too - but that's beyond the scope of our site at present. There's bags of literature on this subject though which Google can help on.

There are though several schools of thought on the subject of diversification within the equity asset class. These include breadth, sector diversification, geographic diversification, factor diversification and correlation. All these ideas try to reduce risk, volatility and drawdowns in portfolios... but often the more one diversifies, the more one sacrifices returns in the process. The extreme of diversification can be thought of as an index fund - which gives you the market or index return - so one doesn't want to take it too far. All of us here invest directly in equities because we want to improve on the index return - so all that follows in the next few paragraphs needs to be taken in moderation. The goal is to maximise the 'risk adjusted return' - i.e. to reduce risk, but not sacrifice all the possibility to beat the market. We don't want to completely cage the bird.

So here goes... firstly on portfolio breadth - I've written an article on the subject here which I won't duplicate, but essentially there's a lot of evidence that one should diversify across 20-30 stocks as soon as it's economically feasible rather than the 5-10 that most naive investors favour. There's a far lower risk of ruin investing in broader portfolios, and the upside is just as strong with lower risk.

By factor diversification I mean diversifying across stocks that have exposures to Value, Momentum and other return drivers. This is a more modern approach to diversification - it ensures you won't be only exposed to e.g. value stocks when value investing goes out of vogue. Nobody wants to be stuck in value stocks when there's a bull market in other parts of the market (e.g. late 1990s) - so diversifying across other 'factors' like momentum stocks helps returns and lowers the risk of underperformance. I've written on this subject many times, and the StockRanks system to some extent helps ensure exposure to these ideas. Some believe you should take half a portfolio of Value stocks, half a portfolio of Momentum stocks.. others believe you should just buy Value & Momentum stocks (like our ranking system) - how one skins the cat is again a personal decision.

I appreciate I may be going off topic as the question I was asked predominantly relates to sector diversification. But my take on sectors is quite simple - try to focus on high probability shares while avoiding concentrated sector exposures. One doesn't need to mirror the sector weightings of the index or get too neurotic about ensuring exposure to all parts of the economy. What we should be trying to do is ensuring that we don't get caught out investing in purely e.g. energy stocks when the bottom falls out of the energy market. We sometimes never know when an issue will hit a part of the economy, so it's prudent to diversify sector wise. How much is a personal decision - utilities may never make you rich, but they sure can provide a defensive base in rough waters.

We use the Thomson Reuters Business Classification Schema for sector categorisation which includes 10 economic sectors. I think it's a good system. Though there are others like the GICS classification or the FTSE sector classification which we don't publish. You can read up on TRBC here. I also personally further segment the market into 3 super-sectors - cyclicals, sensitives and defensives - which I'd like the site to reflect over time.

  • Cyclical: Financials, Basic Materials, Consumer Cyclical
  • Sensitive: Energy, Telecoms, Industrials, Technology
  • Defensive: Consumer Defensive, Healthcare, Utilities
Portfolios ideally ought to have exposure to each of these broad segments, if not the full 10 sector spectrum. There are plenty of market timers who try to ensure maximum exposure to cyclicals in an economic upswing, and maximum exposure to defensives in a downswing - but macro forecasting is a guessing game that is hard to win and can increase transaction costs which is a drag on returns. It's possibly better for longer term investors to just ensure exposure to defensives, cyclicals and sensitives at all times so that one isn't second guessing. (Currently the number of stocks in the UK market is split 2:2:1 cyclicals:sensitives:defensives).
The top StockRanked stocks do weight heavily towards cyclicals and industrials at present so being sector exposure conscious in one's portfolio construction is prudent. Of course sometimes in a personal portfolio you have to use common sense. Is International Greetings really a basic materials stock as classified? Or is it more of a consumer cyclical - or even a consumer defensive ? Rigid classification systems don't reflect economic reality no matter how good they are - I always find myself questioning them. In a 20 stock discretionary portfolio it's wise to take a second look and think.

And of course one shouldn't forget that most UK portfolios are exceedingly biased towards the home UK market. Home bias is a well researched blight on portfolio returns as it ignores the returns to foreign stock markets and economies- never ignore geographic diversification. There's a lot on this subject in our ebook Getting Started in US Shares. The UK is a mature market with an ageing demographic - should we really be ignoring the big opportunities abroad? You don't need to go and buy foreign listed stocks -one can gain exposure to foreign markets through UK listed stocks, but it does need some conscious effort to ensure stocks selected have foreign sales exposure. This isn't something we can do yet at Stockopedia but I'm hoping we'll be able to in the not too distant future. (Of course you can research US and European listed shares here.)

I'm sure with all the above I've lost a few readers. Investing should be simple, but it shouldn't be made hard. There's often too much to think about when diversifying and fulfilling the above checklist may seem impossible. The software will help on the above in future - but it doesn't quite yet - so it needs to be a personal, conscious thought process.

I will leave this extended comment with one last thought... volatility is designed to separate fools from their money. We diversify to reduce short term volatility - creating safer short term returns often at the expense of long term returns. Reducing volatility is a balm that makes us feel safe, but it can ultimately ruin our long term returns if taken to extremes. I believe everyone investing in equities should try and feel comfortable with risk, and comfortable with occasional short term pain for long term gain as long as they are exposed to real return drivers.The best book for understanding this ideais here.

So my own personal take is to diversify just enough, but not too much... I call it Goldilocks diversification... and it's very hard if not impossible to know when you've got it right - so don't sweat the small stuff !

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pka 4th Jan '15 18 of 46

Ed, Thanks very much for your long response to my questions. You only indirectly answered my questions, but I think your response is interesting and useful nevertheless.

My conclusion from what you wrote is that my current rule of not selecting more than one stock from each 'Industry Group' (as defined by Stockopedia) for my 20-stock portfolio (which uses the Stockopedia StockRank as one of its selection criteria) is probably a reasonable compromise between diversifying my portfolio (and thereby reducing its risk and volatitlity to some extent) whilst retaining stocks that have a good chance of out-performing the All Share Index. The rule also has the advantage of being easy to implement, so I will probably continue using it unchanged.

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PhilH 4th Jan '15 19 of 46

In reply to post #89638

Hi Ed,

Many thanks for your very detailed response.

I'd be interested to see the latest comparison between Stockrank and QVGM as the old back tester is showing little difference between the performance of the top decile.

Are there any plans to give us access to this facility so that we can back test our own scenarios, e.g. forks of the QVM strategy.

Thanks in advance
Phil

Professional Services: Sunflower Counselling
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pka 5th Jan '15 20 of 46
1

Ed, Re-reading my last post, I think it might come across as a bit grudging, which wasn't my intention. Many thanks for your very interesting and useful discussion of methods of diversifying a portfolio in your response to my original post.

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carmensfella 5th Jan '15 21 of 46

Did you have a Naps for 2013 that I can look at and see how it all panned out ?

I do a regular review of my top ten and they are certainly not tips but always interesting to see how they continue to perform over a long period compared to benchmarks and indeed just by comparison with the very long tail of stocks I have in the remainder of the portfolio. It can be found here....

http://boards.fool.co.uk/a-not-too-scary-end-to-2014--13143308.aspx

My five to watch this year as entered in various competitions for stock picks in 2015 are RTC, SPRP, UNG, SPL and HMLH. Two of those will definitely do well through 2015 and the other three will be exciting and potentially double or even triple and one is based overseas so there is added risk ! DYOR naturally.

David

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johnrosier 5th Jan '15 22 of 46

Super article and nice to see AdEPT Telecom on the list. I originally picked this stock up after it appeared on my Stockopedia screen. I visited the company down in Tunbridge Wells and was impressed by their discipline in terms of capital allocation and commitment to cash generation and creating shareholder value. They have increased the dividend substantially over the last two years and have now commenced a share buyback.

It is the seventh largest shareholding in the JIC Portfoio at 4.2% and having had to be a little patient since first buying stock in September 2013, (subsequently I added in November '13 and March '14), it is now up 20% on my purchase price and I for one will not be selling them back any of my shares!

My last posting on AdEPT in November last year

Website: JohnsInvestmentChronicle
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jjis 7th Jan '15 23 of 46
1

In reply to post #89638

Happy New Year and thanks for a great article and your earlier book suggestion which I am just reading. On the QVM / QVGM debate I would like to add my tuppence worth.



When I worked in the city I worked for a house that followed a Simple Quant / BF model not dissimilar to the one you have developed except it was generally described as VGM (although there were also some quality / financial metrics in the black box too). As at that time, despite growth being an underperforming factor, it was found to improve the model overall.



Value was just the simple earnings yield although I would accept that your combo approach works just as well.



Growth focussed on earnings growth ONLY, which tends to drive ratings and works well when combined with estimate revisions, but I'll come back to that.



Momentum had Estimate revisions and 12 month Price momentum plus a one month reversion factor.



Quality / Financials were represented by ROE and Interest Cover to give a 6 factor model.



As a value / yield investor I sometimes struggled with the momentum aspects, but did find that they were useful in keeping us in and out of stocks.



For growth / momentum plays it is the interplay between the rating and the estimate revisions that needed watching. Positive revisions made it more likely the numbers would be hit and further serial upgrades may follow hence helping to support or expand ratings. But you knew if you were running a stock like that you had to head for the exits at the first sign of trouble.



Conversely for value plays the Momentum factors helped to keep you out of "Value traps" by avoiding the under performers with downgrades. While cheap unloved stocks getting upgraded would be interesting turn around candidates.



I certainly found that drilling down into the underlying factors (which I think you are planning to offer) was instructive in terms of the support or otherwise that estimate revisions could give to other metrics. I think there has been research to show that momentum factors can improve results in value (I think your Ben Hobson provided a link to a Quant house showing this).



So the ideal stock / portfolio in aggregate would have been cheaper than the market, with faster forecast earnings growth, supported by above average earnings revisions and positive price momentum. The ROE and interest cover metrics would then also steer you towards the better "quality" names in terms of operational and financial metrics. This all played to the value and momentum performing at different times. Some funds even stitched a value portfolio and a growth / momentum folio together to achieve a purer version of this. So overall quite close to what you have come up with except for the earnings growth element, but then arguably your is more sophisticated or complicated, but then some argue for simple being better.




Finally in terms of the whole momentum debate we certainly found that it worked most of the time when the market was trending in either direction, but struggled somewhat in a sideways trading market that we have seen in 2014. Where it really stopped working and blew up was at an inflection points in the market i.e. when it tops or bottoms out. Thus all the highly rated winners would suddenly get caned and defensive stocks would take over for a time and it would take about 3 to 6 months for the price momentum indicator to pick this up. Equally at the bottom the defensive stocks would suddenly get trounced as all the terrible looking trash suddenly bounced back unexpectedly and again it would take 3 to 6 months for the momentum compass to re set itself.



The only defence to this was either to accept it if you are running a pure quantitative approach which is what I think you lean towards. OK for PI's but clients tended to get very upset around those periods. Or you can employ a manual over ride at turning points which is easier said than done but may be more obvious not long after the fact. Will be intersting to see how QVM goes when / if we reach a turning point in the market.


Cheers

jjis

Website: Compoundincome.org

Twitter: @CompoundIncome


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Edward Croft 7th Jan '15 24 of 46

In reply to post #89830

JJS - there's plenty that can be done to improve Price Momentum as a factor. It's a project for 2015 for us, but I'm hoping we can switch to using Residual momentum rather than plain Vanilla momentum. Plain Vanilla Momentum does have a tendency to 'crash' from the long short perspective at market turns - I've written about it here - http://www.stockopedia.com/content/how-momentum-tr...

Price Mo is only 1/6th of the overall StockRank which I'm comfortable with. There's certainly plenty of scope to up the exposure in future once we've made the adjustments.

re. Growth as a factor. In my experience, some growth metrics work v. well, but not as overall market ranking factors... just for the top decile. One of the key goals of the StockRanks are to rank all stocks in the market, rather than to create a single super stock portfolio of 20 stocks - I'm struggling to find a growth metric or composite that creates a classic decile spread across the market - the deciles tend to remain flat. For our GrowthRank the top performing set has been the 30th-40th percentiles - which I think says a lot about the tendency of growth stocks to mean revert !

On that note - take a look at Boohoo.Com (LON:BOO) today which is what out and out growth investors are up against on a regular basis -45% in a single day! Growth investing is sexy, but I think it's a crowded trade - everybody is going for growth as they 'know' that eps growth is what drives stocks. What they don't seem to know is that eps surprises have way more upside in value stocks than in growth stocks as growth stocks tend to be overpriced.

Good to debate this stuff.

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jjis 7th Jan '15 25 of 46

In reply to post #89840

Hi Ed thanks for your reply, would be interested to hear more about residual momentum.
Certainly agree on growth stocks like BOO, that's the risks that investors run holding these highly rated growth stocks and I see they have missed big time numbers which were being downgraded for the last 6 months or so.

Personally I'm much more in the value / yield / income camp so no way I'd have held or be buying into BOO even though its in Mr. Markets January sale at less than half price, but best of luck to any one who holds it or buys it down here if they want to play that game, maybe it will bounce back.

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herbie47 7th Jan '15 26 of 46

In reply to post #89616

Interesting selection, David. Not sure I would class Reed and Galliford Try as Industrial. Cenkos depends on Quindell investigation which of course screens will not pick up on. Yes Dee looks good, just bought some myself. Energy depends on oil price. Looking at a few others on your list, hope the sp will fall back a bit. Looking at ZYT in technology.

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