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

Whitbyview 6th Jan '16 22 of 161

Enjoyed the article but have a comment about the use of sectors, Ed. The logic of spreading across these is to diversify, which I agree with totally. The problem is that some companies activities go across sectors and although I'm not suggesting any sectors are wrong, some are a little debatable. Energy stocks were hammered last year as you mention for instance. NWF did well but is that because it bucked the trend or is it because it's interests are not really in the energy sector? I guess what I'm trying to get at is that your diversified set might not be quite as diversified as you might hope for. As for your inclusion of FTSE 100 companies, I'm pleased to see that you have picked almost all the ones I have chosen, although my rationale was more focused on yield, which NG, GSK and SBRY give you. Are these significant dividends built into your year's performance figures as a matter of interest?

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DavidWithers 6th Jan '16 23 of 161
1

The diversification rules state "No more than 1 from each industry group - to minimise single industry risk." but you have included Indivior and GSK. Do you feel they are sufficiently different to ignore this rule?

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laynab 6th Jan '16 24 of 161
1

Ed,

Excellent article, especially coming a few days after Gundroo's piece on his own success.

With all the usual caveats, not the least of which is it's all about time in the market, not timing the market, would you share your thoughts on the widely predicted imminent crash, using your process/luck matrix?

Two queries:

1. Can you provide the screen for Europe & US, for those of us subscribing to and investing in those markets?

2. Using the algorithms, how far can you backtest, to show how the 2015 and 2016 NAPS would have performed in other market conditions.

Best wishes.

AK




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Edward Croft 6th Jan '16 25 of 161
2

In reply to DavidWithers, post #23

David - that's a good observation, and does need clarified. I should have done so in the article.

Actually my original rules were StockRank > 80. But with this rule I ended up with only 1 Healthcare stock and short a large cap... that left me in a conundrum... which of my rules should I break ?

  1. I considered using the QM Rank to select the highest ranked Healthcare large cap which would have been Abcam.
  2. I considered breaking the sector diversification to choose the highest ranked large cap across all sectors - which would have been Persimmon.
  3. And I considered breaking the 80+ rule and staying in the same sector.

I chose the third option and dropped the cutoff to 75.  But I could only find 1 large cap that qualified and it was in the same industry group.  So I had to break the industry group rule to finish the portfolio.

I notice today that UDG Healthcare would have made the cut in a different industry group. So there's a new option above 75 today.

It should be noted that Healthcare isn't the only sector with 2 from the same industry group.   Telecoms only has a single industry group to choose from.   So we do have 2 Telecom stocks and 2 Pharmaceutical stocks.

Blog: Follow @edcroft on Twitter
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Edward Croft 6th Jan '16 26 of 161
5

In reply to laynab, post #24

As long as I've been investing there's always a crash around the corner. I've learnt not to trust the averages nor the pundits. I was paranoid last January, and the year proved very fruitful. If I'd listened to my instincts I'd have stayed on the sidelines.

I'm always as concerned as anyone. The US stock market is clearly overvalued. It's been struggling to make new highs after a stonking 6 year bull run. Sure, if the US has a wobble, all markets will have a wobble, but volatility is par for the course in equities - taking on equity risk is why we get paid.

The best advice I've heard is to 'sell to the sleeping point' - but how you do that selling is the important thing. I never sell outright any more as I never get back in at the right time. I sell short instead (to hedge). It's so much easier to unwind a short than to buy back in.

Blog: Follow @edcroft on Twitter
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Mikeyflange 6th Jan '16 27 of 161
1

Hi,
Thanks Ed for the 2016 Naps portfolio.

I guess performance of the modified rules will become clear in 12 months time.

I decided to invest in my 2016 Naps using the original rules ..about half the portfolio overlaps with the new rules based you published above.

Thanks for the added value to the service, makes it worthwhile.
Mike ,


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steviej 6th Jan '16 28 of 161

In reply to Edward Croft, post #26

"Sell down to your sleeping point" is my favourite Jesse Livermore quote, although he claims to be quoting someone else.

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herbie47 6th Jan '16 29 of 161

I was looking into Hilton Food (LON:HFG) not I company I know much about and I just don't get why the high ranking and the increase in share price, margins are very low about 2%, EPS is flat or negative, same for sales. Graham F. -39 Yes the EPS for 2016 is +23% not sure where this comes from and how reliable it is, note 2015 results have not been released yet. So what am I missing? Is all based the future EPS?

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herbie47 6th Jan '16 30 of 161

Just been looking at my NAPS I did last year, I picked 20 shares similar rules to Ed's original NAPS. The one I did in December is already as high as the June one. June has only gone up 3%. Actually even though the markets have been down this year the NAPS have done well.

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Ramridge 6th Jan '16 31 of 161
2

In reply to Edward Croft, post #26

Hi Ed -
Looking back over 2015, I 've had a similar problem. I am kind of hardwired to sell as soon as a stock has gone over approx 25% gain. The itch gets worse when the gain reaches 40%. The result is that I have left a lot of money on the table by folding my cards. ( 2 multi-baggers in 2015)
Think I will try your approach of short selling for the reasons you state.

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andrewdb 6th Jan '16 32 of 161

Ed,

Have you modelled the effects of seasonality along with a random high SR portfolio
(i.e.invest 100% Nov 1, 100% cash May1, 100% invest Nov 1...)

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dawnpatrol 6th Jan '16 33 of 161

Great article and a nice carry on from Naps 2015!

By getting a circa 40 percent return in Yr 1 has huge implications, as you could now get much lower returns in future years and still manage a great average rate of return.

I think the challenge will come on how to rebalance the portfolio, when, how...

Ed, you have commented before that your personal portfolio also uses other investment instruments, which would imply...for you....the Naps portfolio...isn't 100 percent suited to your investment style.

But that is the great thing, we can all assess what levels of risk we are willing to take and act accordingly..

It would be great to jump into a time machine and pop to the end of 2016 for an annual review!

Happy New Year!



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herbie47 6th Jan '16 34 of 161

Hi Edward, How did the SNAPS do?

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BahrainChris 6th Jan '16 35 of 161

Great article.

I wonder what effect reversing the market cap criteria would have. So, instead of setting a floor for capitalisation to omit micro caps setting a ceiling so that only micro caps were included.

This would be to me at least only of academic interest because it wouldn't fit my risk appetite. Might still be interesting though?!

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herbie47 6th Jan '16 36 of 161

In reply to BahrainChris, post #35

Why not set it up under a Folio then you can check? I have 5 different Naps on the go at the moment.

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Edward Croft 6th Jan '16 37 of 161

In reply to herbie47, post #34

Snaps did 32% over the year. They were up strongly on the rebalance, but didn't do as well as the Naps. The Naps and Snaps now literally Snap again so I didn't want to labour the point in the article... I'll revisit them in June.

Blog: Follow @edcroft on Twitter
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herbie47 6th Jan '16 38 of 161

In reply to Edward Croft, post #37

OK Thanks.

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Edward Croft 7th Jan '16 39 of 161
1

I think what's interesting about the stocks that fall out of the above selection process is how their style profiles vary considerably.

There are some serious "Contrarian" plays like Drax which have had poor momentum, but there are also some high growth "High Flyers" like Alternative Networks in the mix.

Many screening processes end up with stocks that have identical profiles. e.g. many people screen for stocks at new highs. While this is a proven strategy, it does leave the entire portfolio exposed to momentum reversals, which can be quite nasty at times.

The NAPS portfolio approach generates a diversified list not only across sectors and size, but also across styles. Styles come in and out of fashion - Value investing can work really well at times, Dividend investing at others, Momentum/Growth investing at others. A diversified style approach ought to be more robust to all types of markets.

Anyway, that's the theory, and that's why I prefer using stock ranks over stock screens.

Whether it works or not is another matter.  But that's what we'll be finding out.

Blog: Follow @edcroft on Twitter
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herbie47 7th Jan '16 40 of 161

In reply to Edward Croft, post #39

Edward, Alternative Networks (LON:AN.) does not look like a high flyer? Certainly not share price, in fact its in death cross on 50/200 MA. Character (LON:CCT) and Inland Homes (LON:INL) I would say are high flyers although Character (LON:CCT) has lost momentum recently.

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Edward Croft 7th Jan '16 41 of 161
1

Well my definition of High Flyer is based on its high QM Rank (91) and a low Value Rank. It's basically an expensive stock that has high growth and profitability. It's been in a consolidation phase. The P/E should fall if the growth comes through.
http://www.stockopedia.com/content/high-flyers-how-to-beat-the-market-in-expensive-and-highly-priced-shares-109584/

Anyway - this is all semantics to me.

Blog: Follow @edcroft on Twitter
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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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