Semi Year SNAPS - More Top Stocks For 2015

16th Jul '15 by Edward Croft

21 comments 37157 reads

Most stock market watchers could be forgiven for thinking that 2015 has been a bit of a damp squib. Some promising early gains for the FTSE 100 have been all but given up, Greece worries have weighed hard and the dour Scot failed again to regain his Wimbledon crown. But beyond the headlines stock markets have been treating sensible small cap investors to quite a bounty.

The FTSE Small Cap Index is up over 7% year to date while the FTSE Fledgling Index has rallied 17%. Closer to home my own 20 stock “New Year NAPS” list has stormed to a 29.5% return in just over 6 months. In the light of this recent good fortune, I felt it time to dust off my quill and pen a few words to reflect on what’s gone right, what’s gone wrong and what on earth should be done now… if anything at all.

From NAPS to SNAPS…

Newcomers to the site might want a quick refresher of how the NAPS were selected. We’re a DIY research site and we don’t do ‘tips’, so rather than hand pick some stocks for the year like you might find in newsletters or magazines, we thought we’d just throw the task at our core algorithm - the Stockopedia StockRanks. With a few simple filters to avoid tiny and hard to trade stocks we named the 2 highest ranking stocks across each of our 10 ‘economic sectors’… from Energy to Telecoms…. and threw them in a portfolio. You can check out all the original rules here.

Genuinely, I didn’t have vast hopes for this set of stocks as many were selected across sectors (e.g. Utilities) not exactly renowned for market beating returns. But they’ve absolutely trounced the market, beating the FTSE 100 by 22% in six months. Only Idox has fallen into negative territory while every other stock has returned 10% or more. The best, International Greetings, has more than doubled.

All this good fortune has started to make me nervous. After all, this was essentially a systematic portfolio and one of the most important parts of any good system is sound risk management and rebalancing. The portfolio positions have now drifted substantially leaving greater exposures to some stocks and smaller exposures to others. Should we just let our…

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steviej

16th Jul '15

For next year I'd suggest playing with the sector allocations, there's comment on this in the original article. Tech is about 2-3% of the market, but 10% of the NAPS. Maybe allocate one stock to each sector at 5bp intervals - so all sectors with upto

5% of the market get one stock
5-10% get another
and so on (in a similar way to preferential voting systems)

That would reduce the number of stocks in Tech, Utilities and increase in Consumer D/C. I guess this would be slightly pro-cyclical, but two utilities is surely overkill.

Have you thought of putting NAPS into the Screens section? Would complement the Rankings Performance charts

Tom Firth

A great read indeed, thanks for your insights into the thought process behind the new portfolio! I like the description of your battle with biases in the final paragraph, it's just amazing how hard is to think straight when money and reputation are on the line.

The candid documentation of these considerations, however, is going to make it much easier to recognise to what degree you were subject to biases during the process. Quite a useful exercise I think and something I will try to do myself.

Tom

bd3108

Thanks for the excellent article Ed, very interesting and I have looked at quite a few of those companies, Character, Adept, 888, NWF, Empresaria. I also own Indivior although I still like Alliance Pharma and Animalcare in that sector on a longer term view.

Rusty2

Out of interest why was Costain kicked off, it still has a SR of 99?

I'm not a fan of it and I hold Air Partner (LON:AIP).
I do hold Dee but thinking of selling them.
Can't get excited about Carr, growth looks slow and margins are thin.

Edward Croft

@herbie I hold Costain myself. As explained the SNAPS uses a purely mechanical / brute force / survival of the fittest approach. Costain gets the boot because it's fallen to third in the Industrials list and there's only space for 2 industrials. Simple as that. It's the 5th stock ranked overall in the UK though... so other approaches would certainly include it.

@Tom Regarding behavioural biases... I did find myself wanting to override the process while writing. e.g. with Sylvania Platinum - the spread is actually about 4%. That's very expensive to trade, it's also a tiddler and I'd never heard of it so I found myself wanting to choose Centamin instead. But the whole point has been to avoid any emotional or personal selections... i.e. to go for a 100% mechanical approach. But it is very hard to carry through - we have demons that come out when confronted with stocks we've never heard of.

This article should be taken as illustrative only - it's not my own real world portfolio though (as mentioned) I do own 7 of the stocks mentioned across both articles. On a personal level this year I've hedged a lot of my equity exposure, i.e. netting off some of the downside risk in stock markets by employing short sales. There are lots of ways to do this - all have their own upsides and downsides. Spread betting and CFDs are probably the easiest ways to do it in the UK right now but one has to make the decision as to whether to short individual shares, ETFs or indices, or indeed whether to use options. I've been meaning to write about long/short strategies for some time but haven't got round to it.

My own portfolio is just under 2/3 long and 1/3 short across a range of UK, European and US stocks - and employs a fair amount of leverage. I'm trying to capture the spread between the higher StockRank stocks and the lower StockRank stocks while maintaining equity upside exposure. Overall I'm...

net long small cap high QVM & net short large cap low QVM
net long Europe & net short US.

The performance has been very good year to date - my longs have performed well while the shorts have minimised the downside volatility when the market has fallen. I will get round to writing about the challenges of practically implementing this kind of strategy in a future post.

hawkipa

Good article thanks. Prompted me to act in the new year and happy with the results.

Thanks Edward for explaining. Sorry I have another query, Berkeley seem to listed under Financials in SR but are under Consumer Cyclical on SNAPs?

Yes Berkeley Group is a good point - I should explain. When I first wrote the NAPS piece, Thomson Reuters were about to reallocate BKG to Consumer Cyclicals like the other housebuilders. I preempted the change on their word by allocating it into Cyclicals for the NAPS piece but they ended up not updating it. I've left it in Cyclicals for that legacy reason.

I see, I agree it makes more sense being in Consumer Cyclicals.

jimbobjames2002

Great article Ed and congratulations on proving the power of the Stockrank system.

As an aside, I'm sure I'm not the first to ask this but what about developing stockrank charts for each stock, to show how individual stockranks have changed over time? Would be intriguing to see the ranks set against stock performance for individual stocks, or indeed against each other. As Paul Scott has commented previously, its interesting to see how companies with stockranks in the 60s or 70s can shoot up into the 90s on a good trading statement.

Hi Jimbob - we are doing this behind the scenes. We want to release it to the website as part of some major upgrades in 2016 and I'm sure it will be popular.

e.g. Here's Avesco which I know is one of Paul Scott's favoured stocks. We can see the rank has risen since a low in April 2014 quite consistently.

55a7ef6d1b8dbCursor_and___Stockopedia.pn

Now different people might use the ranks in different ways, but for me the 90+ area is most interesting. AVS popped up to a 90 rank in April when it was priced at about 12p just ahead of its recent rocketing move +70% on the June half yearly report. The early move to a 90 rank ahead of the results (and share price move) was due to improving broker forecasts - which pushed up the Momentum rank.

55a7ef635123cCursor_and_AVESCO_Share_Pri

Now I must admit this is a cherry picked example, but it does illustrate the point you've made.

PhilHofGrowYourDough

Nice one Ed!

The European/US stocks I listed in the original thread would have produced a 25% return and that's despite Southwest Airlines Co (NYQ:LUV) dropping 19%

I also wince when my screening keeps throwing up Per Aarslef (and it has been for ages) despite already sitting on a 63% gain. I probably won't add as I'm already sitting on a nice position but it's repeated appearance in my screen reduces the temptation to top slice.

I also can't quite bring myself to buy high stock ranked growth stocks with low risk adjusted PEG when they have a non-cheap PE, for example Nutrisystem Inc (NSQ:NTRI)

Sadly my overall my European weighted portfolio hasn't quite kept pace with my Euro stock naps, still 12% since January with the Greek crisis rumbling has been ok and I think if it's resolved then things will take off again.

Best of luck
Phil

Thanks Ed, can't wait to see it up and running next year!

Cheers, James

Lucas

Ed, good article. thanks for sharing these ideas.

TangoDoc

17th Jul '15

This most interesting. I've never put much faith in theories of future behaviour of stocks based on patterns from the past and realise that much of my stock picking relies on an emotional gut feeling. That means that I am interested in the psychollogy of managing a portfolio as much as the win/lose element. My gut feeling has worked for me in so many ways through life, why change now? i mention this in the context of whether any portfolio has to be arithmetically balanced. It seems to me that, without proof, those with intrinsically neat minds might be offended by imbalance and feel happier when they have evened things up. We are all capable of looking at a winning stock and irrationally assume it can't go higher and sell too soon. That is a sort of roulette approach. We know Mr Market is extremely neurotic but are we not also touched by non-scientific attitudes too? Each one of us likes to think we are unique but, by being on this site, we're behaving like a herd. Comfort zones!
One thing does interest me and that is the level of comfort I feel when I buy an expensive stock in comparison to the slight anxiety when it trends towards the penny share. It is clearly nonsense but I assume it drives others too. What I'd like to know is this; has anyone studied the relative movement of stocks at both ends of the cost spectrum? It might be a hard thing to set up as it is unlikely that the stocks selected for trial will be comparable in any other way.

mikelevie

Ed - while the stock rank graphs are in development, is it possible to create a screen for Stock rank changes in the meantime?

tradermark

Ed, great article again! Managed to pick up on CCT before Xmas and still holding on for the ride, so I won't be dropping it just yet. I understand that you want rigid rules to run the mechanical process, but how much difference is there in choosing between stocks with ranks such as a 99, a 98 or a 96?

For those of us that don't want "the computer driving the car", it seems like a pragmatic approach might be to select from high ranking stocks but maybe allowing a tiny bit of bias in i.e. I don't like mining stocks. I plan to run a real life mechanical portfolio with a trailing stop loss at differing levels of ATR for each share, so that there will be some downside protection against car crashes.

Cheers, Mark

Mike - it's already built - check here - http://www.stockopedia.com/stockranks/movers/

jraitt

28th Nov '15

Ed,
Tad confused - I thought the NAPS was 10 stocks chosen and the 38% appears to be 4 of those and 6 "honourable mentions" and thus looks a bit sneaky. Where can I find a list of the 10 NAPS and/or the top 20 in full - perhaps I missed it as my navigation skills around the site are not too hot.
Maybe webinar will explain.

Novice Investor

Is this what you are looking for?

http://www.stockopedia.com/content/new-year-naps-top-10-stocks-for-2015-89568/

Semi Year SNAPS - more top stocks for 2015

From NAPS to SNAPS…

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Edward Croft

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