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

pka 7th Jan '16 62 of 161

PhilH wrote:

"For example, mid way through the year I might decide to make an outrageous cash bid for the largest holding in one NAPS portfolio, thereby skewing the results of that portfolio. Does that mean that the rules are better or was there some freakish event? Whilst my suggestion is plainly ridiculous there are potentially other lucky/unlucky events that might occur that effect results, e.g. key CEO of a family run business getting killed."

Actually, that's not a ridiculous suggestion at all. If Quindell had been in a NAPS portfolio last year (not that it would have been) there was a takeover of its legal services division by the Australian firm Slater and Gordon at a crazily inflated price. That probably saved Quindell from going bust and led eventually to a big fall in Slater and Gordon's share price.

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QuaysideCapital 7th Jan '16 63 of 161

In reply to PhilH, post #61

Alright, taking into account the example you outlined that's a fair argument - you couldn't compare the two approaches in that context because of freakish share price incidents - I completely agree.

But let's go more scientific with it. Take out the outliers (1), and which approach comes out on top in a given year? Freakish values are omitted in scientific data sets as anomalies, why not in financial data? This approach eliminates the extremes of the luck (good or bad) element from your analysis. Then you can be more objective about the relative merits of your approaches.
That said, filtering out those anomalies could just get rid of some damn good stock picks (e.g. Character). In that situation you have to make a judgement for yourself about where blind luck has played its part.

I'm not meaning to be a pain with this, I'm playing devils advocate. How does one compare and contrast different methods of stock picking in the most objective manner? Don't get me wrong, I appreciate there's only so far you can go (as Ed rightly pointed out) until it does become a subjective matter since everyone is different and has different risk appetites. My academic background is Physics so I'm trying to boil this down to where the one hits the border between the science and the practically of the scenario.

(1) of course you have to agree this - how far out of the mean is an outlier? How long is a piece of string?

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PhilH 7th Jan '16 64 of 161

In reply to QuaysideCapital, post #63

Ed is certainly better placed than me to explain how statistical analysis is performed in financial research.

In terms of comparing investment approaches I was reading about the Sharpe ratio which can used to evaluate and compare the risk-adjusted performance of a fund/portfolio.

It might well be interesting to track the Sharpe ratio for the NAPS portfolio too & the Guru strategies.

I calculated my Sharpe ratio for the last three years (since I switched to Stockopedia) and was amazed to find it was 3.25 for an annualised return of close to 26%.

The higher the Sharpe ratio the less risk associated with the return. So if you wanted a return of 26% you could compare the Sharpe ratios of various products or investments styles that typically delivered 26% in order to determine which incurred less risk.

Professional Services: Sunflower Counselling
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vik2001 7th Jan '16 65 of 161

I just invested £34k following Eds naps rules. In Ed we trust :)

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Edward Croft 7th Jan '16 66 of 161
7

In reply to QuaysideCapital, post #63

QuaysideCapital - as PhilH has rightly pointed out all we're doing is creating samples from the high StockRank population.

If you are a physicist you may understand population sampling. The overall population of high StockRank shares has had a decent hit rate and performance in the last few years. So if we had chosen almost any random sample with enough stocks in it, we should have been able to generate a return that was representative of the overall population. I've covered random portfolio generation before - see this post - http://www.stockopedia.com/content/how-many-stocks...

I think it's fair to say that 25 stocks has been about the right number of stocks for a random portfolio to end up with a return that hugged the 90+ StockRank benchmark closely. But the annual standard deviation of results even at 25 stocks is still quite wide.

From those charts, there's probably a 10% standard deviation at 25 stocks. Given the overall StockRank 90+ population managed a 22% return last year... the 2015 Naps probably were  2 standard deviations of return above the benchmark. That's an outlier result - probably beating 95% of random StockRank portfolios. We got very lucky !  I can't pretend that it was my skill that generated the excess return - so it can't be called 'alpha' - I was just trying to get the basics right and harvest available market rewards.  

Thinking statistically we have to realise that we can't over-optimise or find the perfect strategy with the tools we have at hand - there's a lot of luck and randomness involved. What's most important is to try to get the basics right and manage the worst of the risks. 

Maybe this year the markets will tank and these 2016 Naps will be 2 standard deviations below the benchmark.  That would be a nasty result but not beyond the realms of possibility.   And in answer to someone else's question... that's why hedging and/or stop losses can be such a good idea !  But that's another blog.

Blog: Follow @edcroft on Twitter
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QuaysideCapital 8th Jan '16 67 of 161
1

In reply to Edward Croft, post #66

Ok, with the statistics there I see what you're getting at. Fair point and thanks for the explanation. As always, a lot of appreciation for the work you and the Stockopedia team are doing here Ed - it's all really helpful stuff. Cheers

RT

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Stephen Hoad 8th Jan '16 68 of 161
4

I've got to say I've really been impressed with Stockopedia as I tested it out over 2015. Its fundamental filtering tools save me bundles of time. I'm a professional commodities / FX trader and technical analyst (This yr I will be helping to teach the Society of Technical Analysts MSTA course in London) and trader trainer (www.thestophunter.co.uk). To test Stockopedia further, I built a long/short equity trading strategy around the fundamentals - which I filtered using Stockopedia and added it to my Technical Analysis filters trading US and UK stocks. I traded this strategy from July to end Sept and returned 56% in no more than 3 months! So thanks Ed for the tool and how about building a short only strategy for those of us who can trade in that direction as well for 2016 and see how that does? Stephen

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Techno Trousers 8th Jan '16 69 of 161
5

The investment in effort by Ed and the full Ranks and NAPS approach is impressive. The gains shown far outweighs my mediocre efforts from previous years, and has been sufficient for me to commit real money (40k) to it. However, I did not follow Ed's approach completely as I have made some (small) variations, which IMHO would reduce risk of downside. I may or may not be correct with this, but it helps me to sleep at night. I am also aware that being slightly more defensive may also reduce my chance of upside a little? We shall see.
I also will most probably follow a re-balancing approach which I think is as per Ed's approach, albeit that once again, it is most probably somewhat different.
Anyway, I am happy. For years I have tried to select and pick stocks. I spent a lot of time doing this, and TBH, I had years of outstanding success, followed by years of inept failure. My returns were not good enough. The logic behind this strategy, for me, is clear, and permits me to retain an interest in the stock market, whilst trying to maintain my day job (I am self employed, so limited time).
Thanks Ed. When looking at the NAPS list, unsurprisingly, many are similar, but we do have some differences. Fingers crossed for a successful year.

TT

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robinleggate 8th Jan '16 70 of 161
3

Though using the stockrank numbers in my investing decisions for some time and though having followed your NAPS portfolio, what finally converted me was doing a 6 month back test on my own portfolio and comparing the outcomes of my ten highest ranked shares (6 months ago) with the performance of the ten lowest ranked shares. The results were a gain of 23% compared to a loss of 17% in the folowwing six months.

So I have re-jigged my portfolio along the lines of your NAPS and come up with many of the shares you have chosen. But I have also used some of my own sieves to eliminate one or two shares, ie Sainsbury, whose FCF never covers the dividend and is usually negative.

What I am also considering is using a 20% trailing stop loss, in order to minimize the loss on any really bad picks.

Thank you for being so open on your methods and also for your insights on luck and skill. I would be interested to hear your views on using a stop loss.

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grumpy5 8th Jan '16 71 of 161

Ed, an easy first step to aiding shorters would be to have a table of lowest stock ranks (and recent entrants and departers) to match that of highest. If there is one, I can't seem to find it.

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gus 1065 8th Jan '16 72 of 161

Hi grumpy5 (love the handle!).

For starters, if you look under Ranks and then say, the QVM screen and check on "best to worst" and then tick "worst" this will show the bottom 100 QVM stocks ascending from zero upwards. You can then select individual industry sectors etc., that interest you. Not sure if there is a movers and departers equivalent for low ranked stocks.

Gus.

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Ssen15 8th Jan '16 73 of 161
1

I have a £270,000 portfolio, which I have built over the last 4 years. I've had a defensive mind set and have held mostly big cap stocks ,reinvesting the dividends. Overall, my portfolio is growing, but in the last 12 months I've suffered significant falls on GSK BP Shell Centrica RR,etc. My experience with Stockopedia has been to make me even more conservative. Piotroski and Altman scores seem to inhibit any trader tendencies I might have.
This year I'm going to try to follow SRs more closely which means that new money will go into the portfolio and will cherry pick from the Naps. Overall, I am very pleased with the level of analysis that Stockopedia provides. In a very uncertain world it consistently aids my decision making .
Ssen15

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gormanpd 8th Jan '16 74 of 161

Great article.

As a Euro-based investor I have applied some of the Naps approaches to the all-Europe stocks database - but these high-score a disproportionate number of Eastern European and Turkish shares. A geographical filter would be useful.

In the StockReports and screens volatility statistics and Sharpe ratios for various time periods would help filter some of the more volatile stocks. Assessing risk remains somewhat subjective .....

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PhilH 8th Jan '16 75 of 161
1

In reply to gormanpd, post #74

Hi gormanpd,

You can filter on exchanges, choosing either to include or exclude.

I hope that helps
Phil

Professional Services: Sunflower Counselling
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Edward Croft 8th Jan '16 76 of 161

In reply to gormanpd, post #74

Gormanpd - yeah these are good points. We'll be launching better geographic filtering tools in the next month.

I've got a European set of naps... it's mostly western europe - will probably publish next week.

Re - risk / volatility - yep I hear you... that's coming this year too.

Blog: Follow @edcroft on Twitter
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Edward Croft 8th Jan '16 77 of 161
1

Well my changed approach this year has already helped to dodge one bullet. Games Workshop down 10% today !

We already have Character Group in the "Leisure Products" industry group, so GAW was skipped due to the new rule. The original NAPS process would have selected it.

Luck and randomness ? Or a better process ? I still have no idea, but watching closely.

Blog: Follow @edcroft on Twitter
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pka 8th Jan '16 78 of 161
1

Hi Ed, If both Games Workshop and Character Group had dropped significantly today, I would argue it was due to a better NAPs process, because the new rule has reduced the exposure of the NAPs portfolio to the "Leisure Products" industry group. As it was just Games Workshop that dropped significantly, I suggest it was due to luck and randomness!

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gormanpd 8th Jan '16 79 of 161
1

I will look forward to seeing the European Naps and comparing to my own current list!

Re volatility, a tool that could compute portfolio volatility as wells as stock volatility would be great; dare I also request negative-only moves (Sortino Ratio). There are some very volatile stocks scoring in the high 90's on QVM. Saying at 31/12/16 that my portfolio selection made +X% tells me nothing about the risk I was exposed to .....

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herbie47 8th Jan '16 80 of 161

In reply to Edward Croft, post #77

Yes but under old rules you would have had Treatt (LON:TET) instead of J Sainsbury (LON:SBRY).?

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DavidWithers 9th Jan '16 81 of 161

In reply to Edward Croft, post #77

A 10% drop in the value of one share in a 20 share portfolio is only 0.5% of the overall portfolio value so of little consequence. However, if you held Games Workshop in your personal portfolio would you have sold? Does the profit warning negate the high stockrank? Or does the fall in price present a buying opportunity?

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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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