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

PhilH 6th Apr '16 122 of 161

In reply to PhilH, post #117

Here's the link to the Euro NAPS I put together in January

https://docs.google.com/spreadsheets/d/1yUUat4d6QmUWd5iX4APmlX_QvcOY1hCmrMZgtix-lBY/pubhtml

Interestingly I did include both Manx Telecom (LON:MANX) & NWF (LON:NWF) and I think the reason is that in my screen I use risk adjusted PEG (PEGR) and I'm guessing that they were both below 1 back in January. I've no way of checking that looking at the historical stockreports.

I also included H & T (LON:HAT) but as I indicated I wouldn't have personally bought that stock.

Average performance was -3.34 % however one stock £QFG went ex-dividend in March paying a whopping 26% dividend. If the figures are adjusted for this then the average performance was -2.8%. That is set against a FTSE Eurofirst 300 performance of -7.9%

Jan and early feb was particularly brutal in Europe but things are recovering now.

Not sure if this helps but thought it was worth putting it out there.

Cheers and good luck
Phil

Professional Services: Sunflower Counselling
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PhilH 6th Apr '16 123 of 161
1

In reply to hayashi22, post #120

Hi hayashi22,

You have to ask yourself this question ...

Do I have time to dig into each comapny to get to know them?

or

Do I accept that during the screening process there will be false positives (that may fail or succeed) and false negatives (that don't make the cut)?

I prompt for the latter as I can't honestly, hand on heart say that I can access the quality of a management team. I'd only be kidding myself! AND I've resolutely decided not to rely on anyone else to influence my opinion on that matter.

I can honestly say I know very little about the companies I invest in but I think (with the help of Stockopedia) that I've found a formula that works for me (even if I miss some nuggets or pick up the occassional duffer)

One big difference between the NAPS approach and my approach is that I cut losers, EXCEPT when there is a big wobble in the market where I sit tight for a while and wait for the dust to settle. Then I cut the stragglers

Best of luck
Phil

Professional Services: Sunflower Counselling
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herbie47 6th Apr '16 124 of 161

In reply to PhilH, post #121

OK but Hilton Food (LON:HFG) is only £2.6m net debt and the OP is £26m, does not look that high to me. Also debt is falling and cash is rising. My problem with Hilton Food (LON:HFG) is very low margins and rely on a large contract with Tesco.

Phil this is a NAPS selection, its not something I have done either although I do own some of those shares, but its Stockopedia selection of the highest ranking shares in each sector, with a few tweaks this year, have you have read Ed's article on mechanical selecting? As for red flags I think Alumasc (LON:ALU) has quite a big one, something that Stockopedia does not tell you.

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PhilH 6th Apr '16 125 of 161

In reply to herbie47, post #124

Hi Herbie,

re Hilton Food (LON:HFG) ... You're right. Quickly scanning through I've read the numbers the wrong way around. My mistake! Part of my buying criteria is increasing EPS estimates and that wasn't in place for Hilton Food (LON:HFG) in January.

Yeah I know it's a NAPS selection process ... I guess I'm suggesting potential improvements. So your mechanical selection criteria could include additional rules such as:

net debt < 3 * operating profit
increasing EPS estimates
PEGR < 1
etc etc

Also just because the standard NAP selections are the best available in the UK doesn't mean they are the best choices. Why not widen the pool from which you fish and find stocks that have no issues?

I agree it would be great if the Stockreport also included pension issues. I'm sure it's on the todo list.


Professional Services: Sunflower Counselling
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herbie47 6th Apr '16 126 of 161

In reply to PhilH, post #125

Yes I agree about EPS, too often I look at high ranking shares but the forecast EPS growth is negative or low. I only bought Hilton Food (LON:HFG) because I wanted more in that section as I had very little else.

Yes the UK is not looking that good at the moment, problem with Europe is there are so many companies, then there are buying issues, some brokers don't cover many, as well as currencies issues and the Stockopedia upgrade is quite a lot more than just UK.

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PhilH 6th Apr '16 127 of 161

In reply to herbie47, post #126

There are challenges with moving to a non-uk universe.
Once I'd made the decision I moved all of my investments from Barclays to YouInvest incuding my SIPP, my ISA and my wife's ISA.

There are a lot of companies in Europe but for me that's great. I can choose not to compromise on my investment style.

But fees are higher, even thought the broker might tell you that you can deal European stocks online I've found that most of the smaller companies I select aren't plumbed into online dealing. Plus there are forex charges, plus you can lose some dividends too due to taxation issues.

But for me it's worth it!

Professional Services: Sunflower Counselling
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underscored 6th Apr '16 128 of 161

In reply to PhilH, post #127

Even some big european companies like CPH:VWS have to be telephone purchased :(

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catalogue 31st May '16 129 of 161
2

An update on my multi country NAPS shows that it should probably be cleared out as it has clearly failed. Worse still my total portfolio, like the market, has been lacklustre but well ahead of my NAPS experiment. NAPS has therefore skewed my overall performance. As of today NAPS is down 11.8%. There has been no change to the original selection. Sectors were selected to reduce risk but only Telecoms has two substantial losers, the others have a good and bad within their sector. Only 6 socks of the 20 are in profit. Four are down by more than 30%. Twelve of the stocks would not be permitted in my regular portfolio. While I can identify stocks I would not have bought, like ZAGG, a number of others like Agfa Gevaert and Jet Blue have been hit by market sentiment, as far as I can see. Fourteen are still ranked above 80 on Stockopedia. The selection was made according to the NAPS webinar. I more convinced than ever that QVM is a good starting point for a screen but then the hard work begins of combing through company reports and only then do you make an initial purchase and see how it performs before it becomes a core investment. I have some screen grabs of holdings and rankings etc. to anyone who is interested.

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Edward Croft 31st May '16 130 of 161
3

In reply to catalogue, post #129

Everyone would definitely be interested in the holdings and diversification spread Catalogue. Maybe the community can learn something from your experience. Perhaps the performance has been hit by certain sectors, or certain size groups. Do share them.

I recently liquidated a 1 year long/short multi-country portfolio that performed extremely well - much stronger than the original NAPS from last year. My holdings were about 50% UK and 50% international. It's important to remember that each portfolio is a sample of a broader distribution - no one point case portfolio fully represents the average return of those in a strategy unless it's very widely diversified.

It's been a much tougher environment for factor investing since the beginning of the year than it was last year. The UK NAPS from this article have fallen by 1% - a considerable difference to last year's set which were up more than 30% by May 2015.

I'll be writing a fuller update on the NAPS soon.

Blog: Follow @edcroft on Twitter
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catalogue 31st May '16 131 of 161
1

I would have been very content with a 1% this year :)

Perhaps the community might have suggestions as to what to do next. Liquidate, refactor, leave it for another month and then refactor etc.


574d703806fa1NAPS_-_PR___Portfolio_Asset

574d70532c9b5NAPS_-_PR___Portfolio_Overv

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ken lowes 31st May '16 132 of 161

In reply to catalogue, post #131

Why not look at the reasons you bought and your rules for selling and see what changed. If you would still buy then stay with it or if your rules for selling have clicked in then sell. My portfolio is up 30% but it is the same one that was down about the same last year when I was in oils, mining and gold. My turn will come!!!

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gus 1065 31st May '16 133 of 161
1

In reply to catalogue, post #129

Thanks for sharing catalogue - we usually only get to see the winner's portfolios! Of the 11.8% fall, do you have a feel for how much of this is down to stock price movements and how much is down to transaction expenses? (FX, dealing costs, bid/ask spread). I've looked at gaining diversification by buying overseas stocks but as with dealing with some of the micro caps in the UK the associated costs are so high that you often need a 5-10% up tick in the stock price just to break even. Just sticking with generally smallish/mid cap UK stocks my NAPs is up about 3.5% YTD (or about 5% if I exclude dealing costs.)

Best,

Gus.

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herbie47 31st May '16 134 of 161

I have set up various dummy NAPS over the last year. June 2015 is -2%. The others are not doing that well, the only one that has performed fairly well is the value NAPS that is up 8% since December 2015. Value NAPS is the same as usual selection but exclude any that have VR below 70. Best shares are Hydro International (LON:HYD) +56%, Lighthouse (LON:LGT),  +39%, Drax (LON:DRX) +38%, worst NWF (LON:NWF) -18%, Games Workshop (LON:GAW) -14%, Fairpoint (LON:FRP) -14%.

The Top Stockranking shares, which ignores sectors is up 5%, that was selected in December 2015 also. The normal Dec 2015 NAPS is up 4%.

Picking 20 shares at the same time there will be quite a bit of luck involved.

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ken lowes 31st May '16 135 of 161

In reply to Edward Croft, post #130

Hi Ed
Good to hear that you will be reviewing your NAPs portfolio. I recreated this portfolio and tracked it from day one. Assuming a £10,000 deal and £60 of costs (this would be high as 9 of stocks would not carry stamp duty) it is down about 1.7%, which given the market is acceptable. What I don't understand is 55% of the holding, 11 trades, are on the losing side and yet the QVGM on 7 of them is still above 80% and the biggest faller ANL down 33%, is showing a ranking of 78. GSK on the other hand shows a rank of 68 is up 5%. Of the 9 winning trades 2 are below 80%. Does this tell us anything?
We know that a high SR is not a guarantee of performance but should, hopefully, be a guide to outperformance. I can see nothing in this analysis that confirms this view, or am I looking at a glass half full

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Edward Croft 31st May '16 136 of 161
2

In reply to ken lowes, post #135


We know that a high SR is not a guarantee of performance but should, hopefully, be a guide to outperformance. I can see nothing in this analysis that confirms this view.

Imagine that Spock heard about the game 'football' in space.  He decided to visit earth and watch the best football team on earth - Real Madrid - to see what the fuss was about.  He visits one game, Ronaldo's on the bench in crutches and they lose. Would he then return to the Vulcan motherlode to conclude that Real Madrid were definitely 'not the best football team on earth'?

Spock surely is smarter than that.

Investing is a long term game.  A 6 month period is too short a time period to judge long term expectancy.  We've seen the power of the StockRanks at work for the last 3 years - to expect the same returns as we had last year to occur every year would be an impossibility. 

The 90+ StockRank set is up 1.7% year to date in the UK.  The FTSE All Share is flat.  The NAPS are down 1.7%.  We can learn nothing from this 5 month data set that we don't already know.  This year is young, we can judge it once it matures. 


Blog: Follow @edcroft on Twitter
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Nick Ray 31st May '16 137 of 161
3

I have noticed that nearly every portfolio constructed along NAPS lines has the same shape after a few months. You will have one or two stocks which are significantly up, one or two which are significantly down and the rest spread around middling performance. In other words very much a Gaussian (bell-curve) like distribution. Even though the best might be +30-40% and the worst -30-40% the mean performance is often very much smaller - perhaps only a few percent.

Given that overall performance is seemingly dependent on those one or two outliers it is extraordinary how often such a portfolio does fairly accurately track some invisible index of "good" stocks. For example my NAPS and the Stockopedia NAPS only have one stock in common but they have tracked fairly closely this year so far.

For example, "Questor" updated on their 2016 tips on Sunday and although I can't quite recall the exact figures the gist was something like -20, -6, -5, +5, +20, +20 for an overall +7% performance so far compared with FTSE achieving approximately 0%. But they did not acknowledge that with only six stocks in this portfolio their entire gain was due to "getting lucky" with the -6% stock not happening to be another -20% stock. Everything else cancelled each other out. To me, even their tiny portfolio is basically showing the identical Gaussian-like distribution upto sampling error.

Although it seems counter-intuitive, if you are following a NAPS strategy you should not use a stop-loss to try to chop off the worst performing stocks (provided their quality ratings remain intact.) The reason is that you will be building in a negative bias to the performance because you are only selling on a negative variance movement and never on a positive variance movement. (It is valid to sell if you have reason to believe that the Quality rating has fallen signifiantly as this affects the mean performance not the variance.)

The problem is that when you chop a stock which is down -20% (say) you might be cutting a stock which has just reached the extent of its downward move (perhaps due to some momentum or value effect) and will now recover +20%. If you sell it and replace it you are still hoping for a +20% gain from the replacement and its chance of doing this is just the same as the stock replaced (if it still meets your basic quality metrics). According to Ed's data that probability of rising versus falling is about 70/30 in good times and less in not-so-good times. But you just don't know for any individual stock what will happen.

If you believe that you can predict momentum moves then you might try to sell high-Q stocks in a downward trend with the intention to buy back in again when the momentum trend changes. However this is then no longer a NAPS strategy. The NAPS strategy (as I understand it) only sells to rebalance the portfolio. This mechanism works by locking in the underlying mean trend and explicitly tries to minimise the effect of variance (whereas a stop-loss does the opposite.)

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herbie47 31st May '16 138 of 161

In reply to Nick Ray, post #137

I think that is true of NAPS done over the last year but the original NAPS did not look like that, it had very few losers and mostly winners thats why it was so successful.

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Nick Ray 31st May '16 139 of 161

In reply to herbie47, post #138

That's true. In general the symmetry is around the mean performance, which was very high last year. But you still get the outliers on either side. (Mean is magenta, median is white, in the plot below).

574dea98eeb68naps.png

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Edward Croft 31st May '16 140 of 161
4

In reply to herbie47, post #138

Of course I did say in the article that last year's set was a very lucky sample - a 95% winner hit rate. The average last year for the entire 90+ StockRank set was about a 70% hit rate for winners. This year it's about 50% (or perhaps lower). Mean reversion writ large.

Of course the good news is that most people will only tolerate average performance for 6-12 months, then they'll get bored and head off to invest in story stocks again - they'll get lucky for 6 months or maybe a year then lose their shirts. Meanwhile the QVM factors will just keep chugging along notching up unremarkable, but solid and compounding returns. Tortoise and the hair.

Ultimately patience is rewarded in the stock market - as Warren Buffett once said... "I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

We never set out at Stockopedia to provide 43% compounded returns year in year out... I'd love that to be possible... but markets are much more efficient than that - capital swarms in wherever exceptional returns are found especially in today's fast information diffusion world. Arguably the NAPS may be suffering from that this year.

Blog: Follow @edcroft on Twitter
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herbie47 31st May '16 141 of 161

In reply to Edward Croft, post #140

Yes I think you are right. But I see the Stockopedia performance top ranked shares also do go up sharply for about 1 year and then level for about 1 year, we are now near the end of 1 year of being level, I speculate that after the EU vote if we remain in that shares will take off again, so maybe its time to start buying soon. I have picked up a few recently on valation grounds like Henry Boot (LON:BHY) and Alumasc (LON:ALU).
Yes 43% is exceptional, I think many will be happy with 20%.

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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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