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

BahrainChris 7th Mar '16 102 of 161
2

A constant irritant in these kind of mechanical systems has always been when to sell. In nearly two decades of reading about the stock market I don't believe I've ever seen an decent answer.

Stock Ranks though might, just might, have got closer to the answer than I've seen before.

If, in a NAPS style portfolio, you demand a high Stock Rank before purchasing shares, then it follows (I think) that the Stock Rank could also be used as a sell signal.

I guess my question is what would that value be? 50 sounds sensible because it would then be aligned with the rest of the market (mean reversion?) but I'd be interested in other peoples opinion and justification.

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ls2g08 7th Mar '16 103 of 161

I personally I look at the make up of the score opposed to the total score. If I have bought a "high flyer" (+Q,+M,-V) I sell when it no longer fits that profile i.e. has become a "falling star" (+Q, -M,-V) or (-Q,+M,-V) cant remember that is called. Conversely if a bargain stock has turned into a "high flyer" I consider selling, but not always. If it becomes a "value trap" (+V,-Q,-M) I always sell.

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cig 8th Mar '16 104 of 161

In reply to Funnymoney, post #101

22 is a very small sample and is going to be noisy.

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Funnymoney 8th Mar '16 105 of 161

In reply to cig, post #104

Cig,

I have seen work showing that 15 is enough to track a market for a significant proportion of iterations. The problem is though, that if the average result of the particular stock universe you are looking at is skewed by a small number of high performers then you may well fall short if you do not invest in everything.

We have to remember that the >£350m 90-100 decile follows the expected pattern, but taking all the shares in the top half of that decile gives a different result altogether. The other point to note is that I am looking at a line which has been rebalanced every 6 months for the last 3 years, so this is not the result of just one sampling period. In any event, what we need to see is the data so we can understand what is going on, and also check that there is not an error in the graph calculation.

I remember that when What Works on Wall Street came out the best results actually came from PS ratio <1 and highest I year price increase. A subsequent edition showed more data which indicated the outperformance over 50 years was in large part due to PS ratio < 0.17 (and the high 1 year price increase). I have no doubt that included in the last set were a reasonable number of outright losses, but a lot of very high gainers. WWOWS used I think a sample of 50.


I know that in the US500 the movements over the last few months show the reverse of what one would expect because many of the "dogs" have been subject to short covering and hence have risen more than the value stocks.

Regards

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Edward Croft 8th Mar '16 106 of 161
2

In reply to Funnymoney, post #101

Funnymoney - yes you are right. There are only 2 or 3 stocks in the 20-25 vigintile in some of those periods for £350m+ stocks... so I wouldn't read too much into it.

By contrast, there are maybe 30 odd in the 90-95 vigintile (>£350m).

The low ranking sets get very thin when you apply large cap filters as large caps tend to be better quality stocks.

These charts are noisy and need interpreted with a bit of judgement - one has to compare like with like and recognise when the sets are highly different.

Blog: Follow @edcroft on Twitter
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erkithe 2nd Apr '16 107 of 161

I've done quite well from the NAPs system. Like many others I followed with interest the webinar and adjusted 25% of my portfolio to try this approach. Out of the 12 companies I selected so far only one company (GAW) is negative even with all the market issues we have seen in the first three months of this year. I've topped up once so far and will look to top up again after the EU vote, just in case. But so far so good. Its been very interesting and quite profitable.

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herbie47 3rd Apr '16 108 of 161

In reply to erkithe, post #107

You have done very well but when did you start?

All the NAPS (20 shares) since June have pick up a fair share of losers and none are making really making any money. The one in June, so 10 months old is down 2.5% inc. spread but not costs. 3 shares are down 30%+. The one in December 2016 is breakeven, 5 shares down over 10%. Ed's 2016 one is down about 2% and has 4 shares down over 10%.
So did you buy all 12 at same time and what rules did you use?

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vik2001 3rd Apr '16 109 of 161

I started my Naps in Jan 2106 probably a week before the crisis started this year, and my NAPs is down around -3.5%
the worst performers being NWF and Alternate Networks which I have removed.
I think for anyone who done the NAPS this year timing plays a critical part if your up or down. if you invested after late February its probably doing ok, if you invested before in Jan you will be down

ive since February also added some funds to create some stability in my overall portfolio, separate to the NAPs but still included in my ISA. these funds include:
Woodford UK equity down at -0.35%
Marlbough UK Multi Cap down at -0.25%
Lindsell Global equity up at 5.1%
Fundsmith Global Equity up at 4%
also added JPM Global Macro Opportunities this month.

the funds I'm going to keep long term for at least 5 years and judge performance then and top up regulary.
interested to know what funds if any people run also in their portfolios?

as far as the NAPs go I will review after Brexit in late June, and decide whether to rebalance anything. anything down at around -20% I will get rid off.  not been a good start to the NAPs, but market conditions have been terrible.  be great to see he NAPs push ahead and still outperform, but with brexit looming I'm wondering how much of a impact it will have and whether we could still see another downfall.

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ACounsell 5th Apr '16 110 of 161
1

In reply to vik2001, post #109

Hi Vik 2001,

Similar experience with 2016 NAPS for 1st Qtr - currently down c. 5.0% (excluding transaction costs) with poor performance in particular from Alternative Networks (-30.8%), NWF (-17.8%) & International Greetings (-17.4%). Interesting only Alternative Networks seen fall below 80 in stock rank - other two still well into top decile for sector. Followed NAPs strategy fairly closely though for various reasons flexed it a bit substituting Treatt for J Sainsbury, Hydro International for Alumasc, Jersey Electricity for Drax, Advanced Medical Solutions for Indivior and Animalcare for Glaxo Smith Kline (some of these stocks were in Ed's honourable mentions and all except Advanced Medical Solutions had very high stock ranks). This meant underperformed Ed's 2016 NAPs (estimate a -4.4% return since Jan 5th) as didn't hold two best performers - Drax (!) & J. Sainsbury though this offset by not holding Indivior. However both Ed's NAPs and my adjusted version underperformed the FTSE All Share which was down -1.1%. Only one quarter I know and in the interests of experiment (!) still holding all selections but with Brexit vote in June not looking good for the sort of returns Ed achieved last year. Perhaps a SNAPs selection at half year will be the answer this year especially if we vote out and share prices dive!!

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vik2001 6th Apr '16 111 of 161

Hi A

ive also removed Alternative Networks, NWF & International Greetings. anything heading into the -20% area for me will be removed from the portfolio and remains invested elsewhere.

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Edward Croft 6th Apr '16 112 of 161
1

My tracking of the 2016 NAPS is showing a 1.9% decline (excluding transaction costs) - which is in line with the FTSE All Share year to date.  There was a roughly 7% decline by February 11th, but it's clawed most of that back. 

5704c3c35d316NAPS_2016___Portfolio_Repor

Only 7 shares are in positive territory... with Drax up 17%, Dart Group up 14%, H&T up 10%, and Sainsbury's up 8%.   4 shares are showing more than 10% losses INDV, IGR, NWF, and AN.

Last year's NAPS were, as I repeatedly stated, a very fortunate set - but there was also a strong tailwind that drove the share prices of the kinds of QVM shares we're targeting.  Many of the indices posted strong gains between January and mid year and momentum was strong.

This year we're seeing churn in the markets as leadership rotates.  UK indices are going nowhere and the market generally has taken a breather.  There's no tailwind... in fact, with all the macro and referendum uncertainty there are strong headwinds.

When factor investing we should beaiming for 'market or better' returns.If the NAPS can post a positive absolute performance in this environment I'll be happy.  Momentum is not in favour right now and investors have to be patient.  Ultimately we're trying to harvest market rewards, but there can't be a harvest without sowing and tending crops.  The best thing to do is to water the flowers, pull the weeds, and have faith the harvest will come eventually.


Blog: Follow @edcroft on Twitter
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vik2001 6th Apr '16 113 of 161

I think the tail wind if it comes will be after June, but not before. a half year snaps towards the end of june will be interesting

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pka 6th Apr '16 114 of 161
1

In reply to Edward Croft, post #112

How does a tailwind help to grow crops?

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PhilH 6th Apr '16 115 of 161

A couple of observations that would have prevented me from buying the losers back in January ...

Alternative Networks (LON:AN.) - Decreasing EPS estimates
Indivior (LON:INDV) - Historical EPS erosion
International Greetings (LON:IGR) - poor debt profile
NWF (LON:NWF) - I personally wouldn't have bought these as I look for cheap earnings growth PEG < 1

Not sure if that helps
Cheers
Phil

Professional Services: Sunflower Counselling
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gpacker 6th Apr '16 116 of 161
1

In reply to PhilH, post #115

Hi Phil

Out of interest if you applied the same criteria to all the stocks would this have filtered out some of the gaining stocks too?

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PhilH 6th Apr '16 117 of 161

In reply to gpacker, post #116

Hi gpacker,

Here's ones I wouldn't have bought ...

Dart (LON:DTG) ... PEG would have kept me out
H & T (LON:HAT) ... came up a lot on my screens but I'm not comfortable owning this business on ethical/moral grounds
Inland Homes (LON:INL) .. reducing EPS estimates for 2017 would have kept me out
Character (LON:CCT) ... I held Character shares in Jan 15 but wouldn't have bought then as PEG was too high and current ratio < 1.2 (but those issues wouldn't have made me sell)
Cambria Automobiles (LON:CAMB) ... current ratio < 1.2 and forecast PEG's for 2016 & 2017 didn't look great
John Wood (LON:WG.) ... yuk ... no EPS growth and declining EPS estimates
Computacenter (LON:CCC) ... poor PEG
TT electronics (LON:TTG) ... decreasing EPS estimates, excessive debt to operating profit
Castings (LON:CGS) ... High risk of earnings manipulation
Manx Telecom (LON:MANX) ... poor PEG
J Sainsbury (LON:SBRY) ... Altman score < 1.8, poor PEG
Hilton Food (LON:HFG) ... excessive debt to operating profit
Drax (LON:DRX) ... High risk of earnings manipulation, poor earnings growth
National Grid (LON:NG.) ... poor PEG
GlaxoSmithKline (LON:GSK) ... decreasing earning estimates, poor PEG


I might have bought ...

Alumasc (LON:ALU)


I'll dig out a list on Euro Naps I did at the start of the year in a Google Portfolio and post it later.

Cheers
Phil

Professional Services: Sunflower Counselling
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herbie47 6th Apr '16 118 of 161

In reply to PhilH, post #117

What about Alumasc (LON:ALU) pension problem?

A bit surprised that Castings (LON:CGS) has high risk of earnings manipulation.

Re Hilton Food (LON:HFG), Net debt is about 10% of operating profit and it has £40m cash?

Re: Dart (LON:DTG) there is no PEG because no est. profit for 2016, however the forecast EPS growth for 2016 is +172% so I think the PEG will be quite low.


You can always find a reason not to buy a share.

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gpacker 6th Apr '16 119 of 161

Thanks for the detail Phil...

Your obviously doing something right looking at your fund.

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hayashi22 6th Apr '16 120 of 161

PhilH-Enjoyed reading your posts.Some interesting thoughts. However have to agree with herbie that from what I know about management Castings is not one you would have down for earnings manipulation.
Very straightforward team there.

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PhilH 6th Apr '16 121 of 161

In reply to herbie47, post #118

Hi Herbie,

For better or for worse I don't dig into pension issues sacrilege to some I'm sure

Re Hilton Food (LON:HFG), my understanding is that the 'net debt' position in the stockreport includes the cash position and as such the 'net debt' in relation to operating profit is too high for me.

I can always find a reason to not buy lots of shares, but I'm looking for ones where the reasons are compelling and there are no red flags.

Best of luck
Phil

Professional Services: Sunflower Counselling
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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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