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

Tuesday, Jan 05 2016 by
122
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

Edward Croft 10th Jan '16 82 of 161
1

In reply to DavidWithers, post #81

Does the profit warning negate the high stockrank? Or does the fall in price present a buying opportunity? 

To be honest I've no idea.   In spite of the fall, the shares are still well up on a year ago, with strong relative strength and the StockRank is still high.  Volatility is the nature of the game in small caps.  

I respect Richard Beddard of Interactive Investor hugely.  He's long followed GAW and I recommend his archive for those who want to do more research - http://www.iii.co.uk/news-opinion/blogs/share-sleu...  He's not commented on the latest news, but am sure he will at some point.


Blog: Follow @edcroft on Twitter
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Michael Yep 13th Jan '16 83 of 161

Ed,
what do you make of Soc Gen and RBS statements yesterday on a cataclysmic crash in 2016 and to sell all shares? Do you agree with their sentiment? Do you have confidence in the NAPS even if the market were to fall?

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Edward Croft 13th Jan '16 84 of 161
13

In reply to Michael Yep, post #83

Firstly,  I don't have a crystal ball and never do predictions. 

Secondly,  re.Soc Gen - Albert Edwards is always uber-bearish (even a stopped clock tells the right time twice a day).  I've printed off his latest.  I haven't seen RBS's. 

Thirdly,  stock markets always crash.  It's to be expected.  Market timing is very hard, but certainly when 12 month indices are showing negative returns some famous trend models (such as Gary Antonnaci's Dual Momentum Timing Model) might say "stay out of equities till 12 month returns are positive".

But fourthly, my opinion is that owning shares should never be a binary decision.  We don't have to be either long or out.   We can be long and hedged.   It's much easier to unwind a hedge than to buy back in. Hedging is easy these days, either buying FTSE puts or selling short stocks, ETFs or indices on spread betting portals.

Fifthly,  I am always as nervous as anyone, so I remain quite hedged.  As I was in 2015.

Sixthly, the StockRanks (and thus NAPS) have done well even as the market has declined, but that can't be expected to continue.  In a steep market decline then we'd have to expect a steep NAPS decline.  Just because they haven't corrected yet doesn't mean they won't.  We should expect 20-30% drawdowns as standard every few years, and if 2008 comes again then 50%+ is not out of the question, and if there's a Great Depression then 80%+.  If the world ends... then 100% ;-( .  

Now that everyone is terrified from my musings... DYOR !

Blog: Follow @edcroft on Twitter
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wattanut 13th Jan '16 85 of 161
1

Apart from the RBS report, many pundits have been very bearish in the last week. I notice that on the front page of Stockopedia the number of stocks trading under the 200 day moving average has reached 60% of the market. It will be interesting to see which strategies hold up this year.

I have sold some low conviction shares and certainly will be hedging my portfolio this year.

Having said that, good luck to everyone this year!

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Mark Carter 13th Jan '16 86 of 161
2

Why didn't RBS warn us nearer the market top?

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herbie47 14th Jan '16 87 of 161

Edward is quite right that NAPS is not immune from market falls, the dummy one I set in June had all its profit wiped out today, it fell 2.3%, the one I set up in December fell only 0.4%, in fact that is ahead of the June one now but has only been going 6 weeks. I think in this market many high flyers are getting hit, so profit taking maybe the order or some topping up.

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vik2001 15th Jan '16 88 of 161

my real life NAPs was up, but today its fell down to -4%
markets have been bad this week.

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dwg 26th Jan '16 89 of 161

In reply to robinleggate, post #70

I have recently adopted a NAPS portfolio system also and have some confidence in it despite 2016 to date that has produced not surprisingly an overall loss. I have contained the losses by use of stop loss orders individual to each holding . My policy is also to replace the stopped out investments by reference to the current high stockrank issues within their sector even where this might involve a repurchase of the stopped out stock. Do you share this approach and has Ed Croft indicated his policy on stop losses.

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vik2001 26th Jan '16 90 of 161
1

In reply to dwg, post #89

I don't think stop losses will work due to the current market votality. im not going to use them just yet else you prob end up selling most things if the downward trends continue

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dwg 26th Jan '16 91 of 161

I understand your reluctance for stops at present but for peace of mind I always enter them and as indicated am prepared to buy back into shares that have been stopped. I do not allow myself to hold stocks that are below their 150 days MA.

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herbie47 26th Jan '16 92 of 161
2

In reply to dwg, post #89

I don't think Ed does use them, its not really the plan, its buy 20 stocks and see how they perform overall, if you keep selling all the time how are you going to judge the performance. Also your costs will be much higher. Studies have shown stop losses lose you money. In this market I think will be selling many if you use 150 day MA.

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dwg 1st Feb '16 93 of 161
1

I thought Ed indicated that he has been using stop losses and short selling to protect his portfolio. My faith in stops continues as it reviews weak holdings and encourages changes into better performers where necessary or indicates a stop has been hit on an issue that nonetheless remains strong and can therefore be repurchased.The cost involved of the spread and commission is a price to pay for the attention it draws to non performers. My dislike of shares that fall below their 150 day MA is from experience (not always correct) that there is innate weakness. I never buy a stock that is below this benchmark.

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Novice Investor 2nd Feb '16 94 of 161

What is significant about 150 days, as opposed to, say, 100 or 200?

NI

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dwg 2nd Feb '16 95 of 161

I have found 150 MA to be a good proxy for the long term trend of a share. I used to use 200 but found this was rather slow for the time frame of investing that I prefer.

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Novice Investor 2nd Feb '16 96 of 161

In reply to dwg, post #95

Interesting.

What sort of timeframe is 150 MA good for please.

NI

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dwg 2nd Feb '16 97 of 161

I look to invest for up to 1 year.

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Nick Ray 10th Feb '16 98 of 161

I have realised, with the benefit of 20-20 hindsight, that as well as using sector and mcap as diversifying factors, it is a good idea to stagger the date of entry of each stock in the portfolio, rather than buy into all the stocks at the same point. This acts in a similar way to the other factors; i.e. it searches for above-median performance after integrating out the factor in question (such as sector, mcap, or date of entry) but only when you take the whole ensemble into account.

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catalogue 17th Feb '16 99 of 161
5

Like many I was fascinated by the NAPS experiment and carefully followed the rules, keeping the sectors but expanding the geography to end up with 20 European and USA stocks. I purchased them all at the turn of the year - not a great time! So far the portfolio is down just short of 12%. The worst is down 50% and the best up 5.5% so all that remains is to have the courage to hang on in there. Bar two, they are all ranked above 90%. The best performer of the day is now ranked at only 50 (it was in the 90s when purchased). More details available to anyone who is interested, although I would expect any interest to be schadenfreude in nature.

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extrader 17th Feb '16 100 of 161

Hi catalogue,

My commiserations ! If a week is a long time in politics, 6 weeks can seem an eternity, if you're unexpectedly under water on investments that you had such high hopes for ;-< !

I'd be particularly interested in hearing more about your US naps, since this isn't a market I've followed up til now ....and it would be useful to understand how (indeed, if !) benchmarks differ 'across the pond' from here in the UK.

Many thanks in advance
ATB

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Funnymoney 7th Mar '16 101 of 161
1

In reply to Edward Croft, post #84

Ed,

I noticed today that the vigintile chart for >£350m shows the 95-100 group performing not only worse than the 90-95 group, but the 20-25 group too. In fact this chart is all over the place and does not follow the expected pattern of improving performace with higher rank. When I checked, there were about 22 stocks in the 95-100 vigintile, so the number is not so small as to indicate a problem due to sample size. I do wonder though if during the period the chart covers there were periods when the number in the group was very low This might have caused a very poorly performing stock to affect performance.

It would be good if you could dig into the data to find out what caused the above result - seeing the actual stocks and their performance would be ideal!

Thanks in advance.

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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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