New Year NAPS - Top Stocks for 2017 and how to play the Joker

Monday, Jan 02 2017 by
123
New Year NAPS  Top Stocks for 2017 and how to play the Joker

2016 has been a remarkable year in the markets with Brexit and Trump creating so much market volatility. In this climate, it’s been proven to be a year for the stock pickers. The wonderful Paul Scott - who writes the Small Cap Value Report daily (now with Graham Neary) on Stockopedia - has absolutely smashed it in 2016. He runs his “Beam me up Scotty Fantasy Fund” on the Stockopedia site which very much reflects his conviction personal picks. After a moderate 2015 (up about 15%) it’s more than doubled in 2016 after a string of stunning wins including Boohoo, Avesco, Lavendon, Gear4Music and MySale. Anyone who has the dedication to follow Paul’s daily blog will have been able to learn about his selections and quite possibly will have mirrored some of his success. Credit to those who have and congratulations to Paul. You can follow Paul & Graham’s daily email update here.

But there are other approaches to the market which don’t take quite so much time and effort but still provide a solid probability of beating the market. And that’s where my own interests lie. As a 41 year old with 3 kids and the Stockopedia business to run I don’t get the time I used to to do the due diligence on individual shares. But in all my research over the last 2 decades, I’ve also learned that I don’t need to. As it’s the turn of the year, it’s time for me to elaborate on this and return to what’s becoming a Stockopedia tradition - The New Year NAPS.

Two years, and tens of thousands of readers

The NAPS portfolios have generated extraordinary interest in the last 2 years. The initial 2015 article has been read more than 40,000 times, while last year’s 2016 piece has been read more than 60,000 times. | don’t know if the articles are being read tens of times per reader, or whether they are more widely shared, but the simplicity of the stock selection philosophy has clearly hit a chord with many. At its core here it is:

Select the 2 shares with the highest StockRank in each of 10 sectors (ignoring microcaps) to create a portfolio of 20 shares. Rebalance.

This disarmingly simple strategy has a couple of key principles behind it.

  • The first principle is that in a diversified portfolio stock selection doesn’t matter.…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

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. ?>


Do you like this Post?
Yes
No
124 thumbs up
1 thumb down
Share this post with friends



3i Group PLC is a United Kingdom-based investment company. The Company has two complementary businesses: Private Equity and Infrastructure, specializing in core investment markets in northern Europe and North America. Its Private Equity business includes investment and asset management to generate capital returns, and is focused on consumer, industrial and business services sectors. Its Infrastructure business includes investment and asset management to generate capital returns and cash income and focuses on the United Kingdom and Europe. It also offers software solutions to unify fragmented data and provide actionable insight. Its subsidiaries include 3i Investments plc, 3i BIFM Investments Ltd, 3i Europe plc and 3i Nordic plc. 3i Investments PLC is the investment manager of the Company. more »

LSE Price
1138.5p
Change
1.2%
Mkt Cap (£m)
10,947
P/E (fwd)
7.9
Yield (fwd)
3.3

CareTech Holdings PLC is a provider of social care services. The Company's segments include Adult Services (Adult) and Children Services (Children). The Adult Services segment consists of the Adult Learning Disabilities (ALD) and Mental Health (MH) divisions. The Children Services segment consists of Young People Residential Services (YPR), Foster Care (FC) and Learning Services (Learning). ALD provides solutions for people living in their own homes, residential care or independent supported living schemes. MH includes a community-based hospital, adult residential care homes, independent supported living and community outreach. FC provides for both mainstream and specialist foster care across England and Wales for children with disabilities. YPR includes facilities for children with learning difficulties and emotional behavioral disorders, and small specialist schools. Learning comprises employment and training services to young people and adults. more »

LSE Price
358p
Change
 
Mkt Cap (£m)
390.4
P/E (fwd)
8.5
Yield (fwd)
3.3

Central Asia Metals plc is a United Kingdom-based copper producer with operations at Kounrad, Kazakhstan, and a zinc and lead producer at the Sasa mine in Macedonia. The Company operates through three segments: the solvent extraction- electrowinning (SX-EW) copper plant at Kounrad in Kazakhstan; the Sasa zinc-lead mine in Macedonia, and the Shuak exploration project in Kazakhstan. It produces copper from the Kounrad in-situ dump leach and SX-EW operation close to Balkhash in central Kazakhstan. Sasa is a zinc, lead and silver mine in Macedonia, approximately 150 kilometer (km) from Skopje. It also operates Shuak, which is a copper and gold exploration project with a license area of 197 square kilometers in northern Kazakhstan and 300km north of Astana. Its subsidiaries include CAML Kazakhstan BV, Shuak BV, Sary Kazna LLP, Kounrad Copper Company LLP, Ken Shuak LLP, CAML MK Limited, Lynx Resources Limited, Lynx Mining Limited and Monresources LLC. more »

LSE Price
191.8p
Change
1.9%
Mkt Cap (£m)
331.2
P/E (fwd)
7.1
Yield (fwd)
7.7



  Is LON:III fundamentally strong or weak? Find out More »


52 Comments on this Article show/hide all

herbie47 6th Jan '17 33 of 52
1

In reply to post #165423

Thanks Ed, I think European would be worthwhile, looking at the guru screens most European based ones seem to outperform the UK ones but maybe that is partly due to currency movements.

Only problem with European shares is being able to buy them online through my broker.

| Link | Share
Needham0 6th Jan '17 34 of 52
1

Congratulation, Ed on another excellent article. The support for UK stocks is amazing, and cheap at £200.
However, I think you should do other market NAPs and perhaps focus more on these regions as everything written is UK bias at the moment. In the present climate we all need to diversify as much as possible but need more support,
I would certainly upgrade from just UK if there was more support for other regions than just the Stockopedia report ( which does not include all info eg Dividends etc) as UK Stockopedia Report
Hope this is helpful

| Link | Share
Irishmanabroad 7th Jan '17 35 of 52
1

Hello,
Just to add, I would love if you could manage a Swiss NAPs

| Link | Share
Cjenkins8 7th Jan '17 36 of 52
1

Hi Ed

Wonderful article - hope this is a new question as I haven't read all the other posts

You have convincingly demonstrated the outperformance of the top decile stockcharts - however, the other potentially amazing thing you alluded to in your article was the relative outperformance of a diversified portfolio.

However, I wasn't sure how much to read into your graph as we know that individual portfolios are going to vary enourmously by chance

My question is therefore : have you been able to do an analysis comparing the median results of n portfolios of top stockranks without diversification vs n portfolios top stockranks with diversification

I'm sure you have or could...

Chris

| Link | Share
johread 8th Jan '17 37 of 52
1

Would it not be more prudent to restrict a NAPS portfolio to stocks with a minimum market capital of, say, £250 million? This should significantly improve the liquidity of the portfolio and reduce rebalancing costs. Is the potential extra gain from including smaller companies really worth the risk?

| Link | Share | 1 reply
Edward Croft 9th Jan '17 38 of 52
1

In reply to post #165762

If you track back to the 2015 cohort, the answer was a definitive yes - the small/micro-caps had a very strong impact. In 2016 they haven't so much, but in the SNAPs portfolio (rebalanced in July) they contributed very strongly again... in fact much more strongly than mid-caps.

587302999159fNAPS___SNAPS_2016_2017_31st

One of the most well known anomalies in finance is the small-cap effect.  Small caps tend to outperform large caps. I personally think private investors are at a huge advantage over institutional investors when it comes to owning small caps... as we can buy in smaller size.  Institutions can't trade them so often neglect them.

The StockRanks have worked best amongst small  cap or penny stocks... here's the top decile of returns for stocks of market cap between £1m->£100m - a near 150% return in under 4 years.  Obviously there's far higher trading costs in the small cap area of the market, so the below would not be fully achievable, but it serves to illustrate the size of outperformance.


5873046688c0fStockRanks_QVM_Performance_

The key point of the NAPS from the start is that it's easy to iterate on the ideas to create a version that suits your own investment philosophy and/or goals.  Changing the size groups, regions, sectors, StockRank styles or otherwise can all be effective alternative diversification approaches. 

| Link | Share | 1 reply
pka 9th Jan '17 39 of 52
1

Hi Ed,

You wrote:

"The StockRanks have worked best amongst small cap or penny stocks... here's the top decile of returns for stocks of market cap between £1m->£100m - a near 150% return in under 4 years. Obviously there's far higher trading costs in the small cap area of the market, so the below would not be fully achievable, but it serves to illustrate the size of outperformance."

I'm not sure of the actual figures, but let's assume for the sake of discussion that £1m to £100m stocks have bid-offer spreads that are 2% on average, whereas companies larger than £100m have spreads of 0.5% on average, which means the difference between the spreads of small and large stocks is 1.5% on average. StockRanks were introduced about three and three quarter years ago, so there have been 15 portfolio rebalances at three-month periods since then to create the StockRank performance records. If all stocks in the portfolio are sold at each rebalance, the performance record of small (£1m to £100m) stocks should therefore be multiplied by a factor of 0.985 (=1.000 - 0.015) multiplied by itself 15 times for a fair comparison with the performance record of big stocks (over £100m). 0.985 to the power of 15 is 0.797. Therefore there should be a significant reduction (of about 20% if my assumptions about average bid-offer spreads are correct) in the overall performance of small stocks in the StockRank records for a fair comparison with the performance of big stocks.

In the above, I have assumed that dividends from small and big stocks are about the same on average. That is probably incorrect, as bigger stocks tend to have higher dividend yields, so if we took dividends into account then that would also enhance the performance records of big stocks relative to small stocks.


| Link | Share | 1 reply
Edward Croft 9th Jan '17 40 of 52
2

In reply to post #165780

pka - you are very right to bring in the trading costs... let's break it down a bit further with your £250m cutoff...  we'll stick to quarterly rebalancing in the analysis (even though I'd never recommend it for most private investor portfolios - but the maths works out pretty similarly on the annually rebalanced performance).

  • Small Cap Stocks (£1-£250m) - quarterly rebalanced performance = 140.06%
  • Larger Cap Stocks - (>£250m) - quarterly rebalanced performance = 73.81%
  • Quarters since start = 16
  • Small Cap 2.5% spread
  • Large Cap 0.5% spread

On those assumptions the performance is just about equal...

  • Small Cap (realisable) performance = 2.4006*.975^16 = 60%
  • Large Cap (realisable) performance = 1.7381*99.5^16 = 60%

But of course the above assumes a 100% rebalance on each quarter - which wouldn't be the case as the portfolios don't churn nearly as much as this.  The last time I looked there was about a 55% churn in the deciles each six months (it would be less quarterly).   But let's call it 50% churn per quarter to be conservative... that would mean the spread cost was halved.

Performance... 

  • Small Cap (realisable) performance = 2.4006*.9875^(16) = 96%
  • Large Cap (realisable) performance = 1.7381*99.75^16 = 67%

i.e. Small Caps may add significantly to the realisable performance, but there are clearly limits to arbitrage.

I believe though that the diversification benefit of including small caps is the far, far greater win than the performance benefits.  And the other thing is, small caps are just more fun / elephants don't gallop... a lot of Stockopedia subscriber portfolios have benefited enormously from stocks like International Greetings (IG Design) in the last few years !  (up about 250%).


| Link | Share
pka 9th Jan '17 41 of 52

Hi Ed,

Thanks for your reply. Actually it wasn't me that suggested a £250m cutoff.

You made some good points. But a point you didn't make is that although small companies tend to perform better than big companies in bull markets, they tend to perform worse in bear markets. The StockRanks performance history extends only over the last four years, which was over a prolonged bull phase in the UK stock market. The last major bear market was over the Credit Crunch years of 2007-9, so we might be due for another in the next few years.

| Link | Share | 1 reply
Edward Croft 9th Jan '17 42 of 52

In reply to post #165786

Actually it wasn't me that suggested a £250m cutoff.

Haha - good point !!!

| Link | Share | 1 reply
finchy 10th Jan '17 43 of 52
1

In reply to post #165789

Ed,

Is there a link to the actual Screen for the 2017 NAPS? The link from the 2016 NAPS article just takes you to the 2015 article.

| Link | Share
bb9210 14th Jan '17 44 of 52
1

In reply to post #165777

Hi Ed,

Thanks for the graph illustrating the performance of returns of shares within a certain market cap range. It would be very useful to be able to have the capability of choosing a market cap range in the Performance section of the site rather than being limited to specifying above a market cap. Are there any plans to introduce something like that?

Regards,

Brian

| Link | Share | 2 replies
Edward Croft 15th Jan '17 45 of 52
2

In reply to post #166843

Brian - you can actually hack it by editing the url. After you've clicked the submit button you will see a URL in the browser. One of the query string parameters is 'cap' - which has a lower bound of capitalisation in millions. You can change this to a hyphen delimited range. e.g. ?cap=10-100 would select all stocks between £10m and £100m. Look at the url below:

http://www.stockopedia.com/stockranks/performance/?exchanges=LSE%2CISD&field=_QVMScore_lo?=10-100&period=1&buckets=deciles

587b84846114eStockRanks_QVM_Performance_

| Link | Share | 3 replies
tournesol 15th Jan '17 46 of 52
2

In reply to post #166894

Ed

You are allowed to take Sunday off you know

:~)

T

| Link | Share
DanielRudd 15th Jan '17 47 of 52

In reply to post #166894

Is it possible to hack the url for developed Asia, Australasia & Canada?

| Link | Share
bb9210 16th Jan '17 48 of 52

In reply to post #166894

Hi Ed, that does not work for me. All I get is a line for the FTSE all share.

| Link | Share
Irishmanabroad 20th Feb '17 49 of 52

Hello Ed

Have you looked at taking actions or setting stop loss on NAPs eg when a stock drops below an overall 80 ranking?
Ciarán

| Link | Share
gfkw47 8th Apr '17 50 of 52

Hi Ed, Can you answer a few questions for me re NAPS.

1. You refer above to a re-balancing on 1st July 2016 (called SNAPS if I read it correctly) and I am wondering if this was a rebalancing you did only as a result of the EU vote shortly before or if it was co-incidental and it would have been done anyway,
2. I note now you are saying that the Joker is to rebalance when a major occurrence takes place that affects the market. Will you be doing this as and when it happens an publish the new picks?
3. I the Jan 2017 NAPS, one company IQE has performed very well but is now showing almost as a junk stock because of its high value. With this system will you just leave a stock like this in place in the portfolio, until a complete rebalancing is done, or would you ever in isolation knock out certain stocks and replace them?
Sorry so many questions!!
George

| Link | Share | 1 reply
Edward Croft 10th May '17 51 of 52
1

In reply to post #179436

Hi there, I really should create a single portal page for all the NAPS articles and the portfolios.

I've been running the semi-year "SNAPS" portfolio at the 6 month mark (July 1st). It's a comparison to see how well a 6 monthly rebalanced portfolio performs vs the annually rebalanced version. There's not been much in it to date, but it was notable that a portfolio refresh after Brexit worked out very well for the SNAPS version.

Most people who are using a similar system to this have created their own iterations on the NAPS ideas. I use a varied version myself with more investment in international stocks and some shorting as a hedge at times. I aim for these articles to be primarily educational, to trigger conversation and be illustrative of some sound thought processes.

So I won't be updating the portfolios ad-hoc or when I think a market friction has happened. I'll be sticking to my Jan 1st and Jul 1st updates.

Re. IQE - yes I've noticed it flirting with Momentum Trap status in recent weeks. It likely won't make it into the SNAPS but would continue to be held in the NAPS till next January.

The NAPS are now up 70% since inception (2015) versus 72% for the SNAPS before costs. So both are running at about 25% annualised. I certainly don't expect that level of performance to continue... I'd be amazed if it did. I was hoping for 14%+ annually for such a well diversified, long-only portfolio.

Markets have been kind for the last few years, and at some point they will undoubtedly turn against us. I've tried to be cautious in the NAPS portfolio construction, and ensure a good diversified spread. In the SNAPS this year I may go for a Risk Diversified approach, rather than a straight sector diversified approach just to mix it up a bit .... I've got a couple of months to think about it.

The NAPS are up about 12% year to date, so it's been a good start to the year.

| Link | Share
Mark Charles 4th Jul '17 52 of 52

Hi Ed ,
I'm jest wondering if this is still something you'll be updating over the next few weeks. Iv found this to be a most excellent way of reviewing my own SR portfolio every 6 months of so ( April to April) for me as I then use my ISA allowance to top up,it's always good to review it along the way & your updates as well as falling halfway have provided great thought & good "how goes it" along the way.

| Link | Share

Please subscribe to submit a comment



 Are LON:III's fundamentals sound as an investment? Find out More »



About Edward Croft

Edward Croft

Follow



Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis