New Year NAPS - top stocks for 2016 and a few revelations

Tuesday, Jan 05 2016 by
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New Year NAPS  top stocks for 2016 and a few revelations

My 11 year old son turned to me a few days ago and asked the most wonderful question… “Dad, have you got any New Year’s Revelations ?” Aside from the sheer pleasure of the phrase, his comment really has got me thinking. What indeed did 2015 reveal ? And what should we resolve to take forwards through 2016 ?

For those who are new to the Stockopedia site, we’ve been on something of a journey in the last 12 months. Back on January 1st 2015 I selected the two highest ranking stocks in each sector according to their StockRank. This set of 20 stocks we titled the “New Year Naps” for reasons you can read up on in the original article. It was essentially my way of using a rules-based process to select some high expected return stocks without relying on any subjective decision making.

Amazing as it may seem, this very much mechanically selected set of stocks returned 43.4% in a year in which the major stock market indices sagged. As we’ve followed the strategy in various posts, the interest in the process has grown, which nudged me to run an hour long webinar last month reviewing the results, and the impact of diversification and rebalancing. You can catch up with the video here, transcript & performance results here and community discussion here.

So I now find myself in the rather precarious position of having set a precedent and I feel a duty to publish a similar set of 2016 NAPS. But before I do I’d like to invite readers to spend some time pondering with me about the nature of performance, process, skill and luck.

A brief 2015 performance review

Let’s put the 43% NAPS performance in perspective. The FTSE Small Cap index returned 5.8%, while the top 10% highest rated UK shares by StockRank returned 22%. Our selections have beaten the small cap benchmark and the general high StockRank peer group by a substantial margin.

As to individual stock performances, the following chart shows that two of the stocks more than doubled - International Greetings (LON:IGR) and Dart (LON:DTG) ; 4 others returned more than 50% - Adept Telecom (LON:ADT) ,

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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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161 Comments on this Article show/hide all

herbie47 5th Jan '16 2 of 161
1

Interesting selection. Re: Inland Homes (LON:INL) note 2015 results were delayed in order to include a large sale so the figures are somewhat distorted, thats why 2016 EPS forecast are well down, also the CEO has recently sold nearly 2m shares. A few have quite low SR scores?

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Edward Croft 5th Jan '16 3 of 161

In reply to herbie47, post #2

Herbie, the StockRanks of the selections go as low as 78 for Glaxo.

That's what happens when you put in extensive portfolio constraints as I have. The sector, industry group and size constraints mean that many, many stocks with higher StockRanks are rejected.  

The returns may be lower as a result, but with any luck the risk should be lessened. We shall see. It's all a live experiment.

There are good arguments for ignoring constraints and just picking the highest ranking shares in certain higher probability industry groups.   I'm sure if someone wants to put some thought into it, they could create a StockRank portfolio that does far better just focusing on certain industry groups.



Blog: Follow @edcroft on Twitter
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ormylad 5th Jan '16 4 of 161

Many thanks Ed, another good article!

I'm glad to see some of my holdings in there; CCT, HAT, MANX, but disappointed not to see my two healthcare holdings; ANCR, EMIS. I'll follow this years NAPS with interest and hope 2016 will be prosperous for us both.

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herbie47 5th Jan '16 5 of 161
3

In reply to Edward Croft, post #3

Lost my reply now.

Anyway yes I understand.

Would it be possible to select another NAPS on last years rules to compare?

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steveallen92 5th Jan '16 6 of 161

Hi Ed, thanks for putting the new NAPS portfolio together I learnt a lot following last years portfolio. My current aim is to put together a portfolio with 30 stocks - a large, mid and small cap from each sector using the rest of the NAPS rules. Would you advise against that for any reason in comparison to the 20 stock NAPS portfolio? I'm hoping that it would lead to a stable outcome and provide straightforward diversification across sectors and size.

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GeoffMM 5th Jan '16 7 of 161
1

Great show again Ed real intelligent insight, gets us mortals thinking as it should.

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johnrosier 5th Jan '16 8 of 161
1

Great article Ed.

Last year I was pleased to see Adept Telecom (LON:ADT) on your list. (I still hold), This year I am pleased to see Inland Homes (LON:INL)

I bought Inland in November having met the management and thought I would share my reasoning, which I posted at the time. I look forward to working my way through the list; a number are already on my watch list.

Inland Homes: 

On 12th November I attended a post results meeting with Stephen Wicks, CEO and Nishith Malde FD. Both are co-founders of the business and hold substantial stakes; 8.0% and 5.6% respectively. Prior to founding Inland in 2005, Stephen Wicks was the founding shareholder and chief executive of Country & Metropolitan plc, which in December 1999 floated on the main market of the London Stock Exchange with a market capitalisation of £6.9 million. He directed the growth of Country & Metropolitan plc until its disposal in April 2005 to Gladedale Holdings plc for approximately £72 million. Nishith Malde and Paul Brett, (3.5% shareholder), Land Director were both members of that team.

Inland’s real expertise is in buying land pre-planning permission and then taking it through the planning process to a successful conclusion. It tends to take on complex situations which require the skills and expertise of Stephen Wicks and his team. The volume housebuilders either do not have these skills or are not interested in this part of the market until consent has been achieved. It then either sells on the land, normally to one of the large national house builders and/or develops the site itself; it’s about achieving a healthy balance and maximising returns. Last year for instance it developed and sold 248 private homes and sold 440 plots. The average price of its homes sold were £264,000 and it is based in the valuable South East ex-London market.

In the current year it says it will probably sell a similar number of homes before ramping up to around 500 per annum. He said housebuilding brings stable cash flow but the “core business will still be buying, developing and shifting land”. He also said “you can turn on/off housebuilding when you like!”

In total it had just over 5,176 plots at various stages of development at the 30th June year-end, up from 3,734 plots the year before.

A third leg to the business is rental income: last year it rented on assured short term tenancy agreements, 30 of the 76 houses it acquired when it purchased the Wilton Park (near Beaconsfield) site from the MOD. It intends to rent the remainder in the current year and hold them as investment assets; the annual income should exceed £1m. The latest results were flattered by a revaluation of this housing portfolio leading to a £ 14.5m uplift to profits. The CEO said his aim was to try and build rental income up to around £4m per annum, enough to cover annual overheads and give some comfort if/when we go into a down turn.

Wilton Park is described as the jewel in the crown; it cost £35m and as well as the 76 homes acquired is expected to see a further 300 homes together with commercial space. It expects to achieve planning permission by September next year and the I expect it will dispose of the development sometime after that; 2017 could be a bumper year for shareholders with it believing the value of the site is around £250m! Remember the purchase price was £35m. Once they get planning permission it could be a disposal but they will be looking to maximise returns to shareholders; there could be a special dividend.

So why have I bought a stake now? I think that there is scope for a substantial uplift in value over the next couple of years, the management is impressive, (they have done it before with Country and Metropolitan), they have substantial stakes in the business and I am sure will see it through to a successful conclusion i.e. a sale to a larger company. The valuation looks attractive to me given the scope for a substantial uplift in asset value. It is paying a final dividend a 0.7p per share, (making 1.0p for the year) on January 22nd giving it a dividend yield of 1.4% with the 67% increase demonstrating “the Group’s continued strong financial position and confidence in the medium-term outlook”. On Stockopedia it has a StockRank of 97 (Value 84, Quality 67 and Momentum 95) and it passes no fewer than 7 of the “guru Screens”.


Website: JohnsInvestmentChronicle
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Edward Croft 5th Jan '16 9 of 161

In reply to johnrosier, post #8

John - I've thought of you every time I've seen Adept Telecom this year. Really glad it's worked out so well. It was one of those stocks that everyone was ignoring, and from memory most were negative on. I find time and again that it's the stocks where there's a disconnect between attention and opportunity that things work out the best.

Blog: Follow @edcroft on Twitter
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timarr 5th Jan '16 10 of 161
1

HI Ed

Couple of things. Your example NAPS stock screen appears to link through to the 2015 NAPS article, which may not be what you intended. And Hilton Food seems to have diversified into the Telco sector, which seems unlikely at first blush ...

Of course by moving away from smaller stocks you're reducing the possible impact of the small cap bias, it'll be interesting to see what the effect of that is. 

Good luck!

timarr

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Hydrus 5th Jan '16 11 of 161
2

Ed,

Good article thanks. Would you take a different approach specifically with microcaps if say you were not measuring annual performance but rather looking at a longer timeframe without a set date for totalling up performance?

Reason I ask is that there are great businesses below £50m which have potential for outsized returns and short term liquidity is only an issue if you have to sell or in your case you have to measure performance at a set point in time, e.g year end.

In theory annual performance is irrelevant for a long term investor, more about the end game.

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gus 1065 5th Jan '16 12 of 161
2

Hi Ed, excellent article. I think your caveats about the significance of luck in the 2015 selections is well made. This said, I suspect many of us would happily settle for even half the level of returns you achieved last year.

Also interested to see many of your Naps match my own (posted in a link on 15/12/15). I make it that we have 11 in common plus I have two of your also ran exclusions. My criteria are a little less risk averse in that I have not gone for as much diversification preferring to pick stronger Stock Rankings at the expense of being light in utilities and healthcare and to an extent technology, telecoms and energy. I think my monkey brain bias has also been to veer towards positive cyclical stocks which might come unstuck if the economy stalls. I also have more small caps.  My full list is:-

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); Mears (LON:MER); Novae (LON:NVA); Sprue Aegis (LON:SPRP); Fyffes (LON:FFY); Safestore Holdings (LON:SAFE); Castings (LON:CGS); Norcros (LON:NXR); Manx Telecom (LON:MANX); Telford Homes (LON:TEF); J Sainsbury (LON:SBRY); and, Finsbury Food (LON:FIF). - See more at: http://www.stockopedia.com/content/webinar-alert-using-the-stockranks-to-build-the-naps-portfolio-113085/?comment=76#76

So far, my Naps are up by about 3.8% after a month or so including costs and bid/offer spread of about 1.2%, even after yesterday's sell off so a reasonable start.  Strong starts from Journey and Inland Homes (up 18 and 19% respectively) offset in part by Somero (down 6%). Sainsbury's was doing well but sold off after today's news re. Home Retail (LON:HOME).  Since I'm also long Home Retail (LON:HOME) in my residual portfolio I'm not too disappointed

All the best,

Gus.

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vik2001 5th Jan '16 13 of 161

the Consumer Defensive sector has been totally left out, interesting

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ACounsell 5th Jan '16 14 of 161
1

Ed,

How do you feel about your J Sainsbury (LON:SBRY) selection given today's news re Home Retail (LON:HOME). Does the 5% drop in share price increase or decrease your confidence in this particularly stock. Guess can now buy it cheaper than today but may raise longer term questions about strategic direction for J Sainsbury (LON:SBRY)

Regards

Andrew

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herbie47 5th Jan '16 15 of 161

In reply to vik2001, post #13

Hilton Foods and Treatt are in that sector, yes there is a mistake in the article with Hilton being under telecoms.

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pka 5th Jan '16 16 of 161

Ed - That's an excellent article.

A couple of weeks ago, I used a similar but slightly simpler approach to create a portfolio of 20 UK stocks. Rather than selecting 2 stocks from each of 10 stock market sectors with no two stocks being in the same industry group, I just selected 20 stocks in order of reducing StockRank with the proviso that each stock must be from a different industry group. I think my approach produces a less diversified portfolio than yours, but on the other hand it produces a portfolio with a higher average StockRank than yours so the expected return from my portfolio is probably higher although there is likely to be greater uncertainty and variability in the return from my portfolio. This is another example of the trade-off between risk and expected return.

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Fangorn 5th Jan '16 17 of 161

Great article...an enjoyable read.

Talking of Drax, this out today vis their next Biomass CFD contract -

The European Commission (EC) has today announced that it has opened a formal (Phase 2) State aid investigation into the award of an Investment Contract(1) to Drax for its third coal-to-biomass unit conversion. This is the next step in the process for obtaining State aid approval and is in line with expectations.

http://www.investegate.co.uk/drax-group-plc/drx/drax-cfd-investment-contract/201601051144578685K/?fe=1&utm_source=FE%20Investegate%20Alerts&utm_medium=Email&utm_content=Announcement%20Alert%20Mail&utm_campaign=Drax%20Group%20Plc%20Alert



Drax Group Plc faces a European Union investigation into the U.K.’s plans to support converting a coal-powered plant to biomass generation after regulators said the aid may overcompensate Drax and the project could harm competition for wood pellets used by other energy producers."

The European Commission said its probe will focus on U.K. estimates for the plant’s economic performance, which it thinks "may be too conservative" and may allow the plant make more money than envisaged, undermining its need for government help.


http://www.bloomberg.com/news/articles/2016-01-05/drax-s-coal-to-biomass-u-k-conversion-aid-faces-eu-probe


Drax pointed out that the project would be its third coal-to-biomass conversion project and said the EC’s decision to investigate the scheme further is “in line with expectations”.


http://www.ft.com/fastft/2016/01/05/eu-opens-in-depth-probe-into-drax-biomass-plans/

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Edward Croft 5th Jan '16 18 of 161

In reply to vik2001, post #13

vik2001 - no it's there... for some reason the sub-heading had been left out. Sainsbury's and Hilton Food Group are the defensives this year.

ACounsell - there's not much I can read into the news flow - certainly the 5% drop in SBRY isn't a great start. I'm just a dumb quant remember :-(

Blog: Follow @edcroft on Twitter
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herbie47 5th Jan '16 19 of 161

In reply to Edward Croft, post #18

I read the bid has been rejected so maybe the share will bounce back tomorrow.

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gus 1065 5th Jan '16 20 of 161
3

Herbie

I wouldn't read too much into the bid being rejected at this point in time. The fact Sainsbur's are reporting on presumably cordial discussions held during 2015 that came to nothing in November only now suggests battle lines are being drawn and there may be a few more salvos fired.

Even at £140p, Home Retail (LON:HOME) is still potentially very cheap and today's news effectively puts it into play with PE looking at a break up and trade buyers maybe wanting some or all of the pieces. Today's spike may in part be due to the minimum 8.5% shorters closing out positions so it may well fall back short term, but I suspect there will be more activity in coming weeks and months. You would need to be pretty brave IMO to put on naked short at the moment.

All the best,

Gus

(Long £HOME).

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JoeRussell 5th Jan '16 21 of 161

Hi Ed
Great thought provoking article once again.
At the turn of the year I made my own 20 share portfolio. I don’t go for as much diversification but my SR average will be a bit higher than yours.

My choices were:-
Industrials
Dart 99,DWHA 98,EMR 98,SPRP 96, ZYT 96, WIZZ 99
Financials
HAT 99, FRP 97
Consumer Cyclicals
CAMB 98, EPWN 97, PSN 97, GAW 99
Energy
NWF 99
Technology
CCC 98, UNG 98
Basic Material
IGR 98, RBN 97
Telecoms
MANX 95
Healthcare
ANCR 96
Consumer Defensives
TET 96

So diversification is in 9 Sectors and 14 Sub-sectors.
Criteria were SR > 90, No or reducing Debt, Market Cap >20m.
Best
Joe

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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »

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