Stock in Focus 2015 review: Did I beat the market?

Since I started writing the Stock in Focus column in May 2015, I’ve covered 31 different stocks. These selections were not buy or sell tips and were not intended to form a portfolio. But if they were, would I have beaten the market?

I’ll reveal the answer in a moment, after I’ve taken a look at the lessons from this year’s big winners and losers.

Stanley Gibbons: -66%

In my original article, I suggested that shares in stamp and collectible dealer Stanley Gibbons were overvalued and heading for a fall.

Roaring cash consumption, rising debt and falling sales all played their part in proving me right. A profit warning on October 6 was followed by a dire set of interim results.

The stock now trades at its tangible book value and could be a value buy. However, I have concerns about how effectively Stanley Gibbons will be able to convert its stock into cash.

TalkTalk: -29%

My second-biggest success of 2015 was also a stock on which I had a bearish view.

At the start of August, I commented on the sudden change of tone in the TalkTalk’s trading statements. I questioned the firm’s rising debt, demanding valuation and falling profit margins and suggested this stock might be a falling star.

Earnings forecasts have since been slashed and I still think a dividend cut is likely. TalkTalk’s StockRank has fallen from 33 at the time of my article to just 11. In my view, this remains one to avoid.

Plus500: +22%

After Playtech’s attempt to acquire Plus500 was abandoned in November, I noted how cheap the stock looked relative to free cash flow and earnings. I put forward the view that Plus500 shares might deliver a useful profit.

Plus500 stock has since risen by 22% in just over one month and now trades above Playtech’s offer at 428p. Plus500 still has a StockRank of 90 and looks reasonably cheap. However, this is an AIM-listed Israeli stock with considerable regulatory risk. Personally, I’d tread carefully from here.

Costain: +18%

My very first Stock in Focus selection has turned out to be one of the most successful. Is that because it’s had the longest to deliver?

Perhaps, but engineering services provider Costain has been delivering steady returns since 2012.

When I wrote about Costain originally, its StockRank was 99. Today’s it’s 96 but the firm’s attractions appear unchanged: net cash, a reasonable yield, and steady earnings growth. This is a stock I would still be happy to buy and own.

Runners up

Honourable mentions should also go to the following companies, all of which delivered gains of 10% or more after I wrote about them:

• Imperial Tobacco: +16%
• Inmarsat: +14%
• SkyePharma: +14%
• NWF: +13%
• Shoe Zone: +13%
• Computacenter: +12%

What about the losers?

My two big mistakes were to form a positive view of DX (Group) and to massively underestimate the scale of the commodity downturn. These accounted for the vast majority of my notional losses.

DX (Group): -78%

A blanket policy of avoiding recent IPOs would have enabled me to avoid this year’s biggest loser.

DX shares collapsed in November, after the group issued a profit warning and slashed the dividend by 58%. Unusually, the shares have failed to bounce back at all.

DX versus the FTSE All-Share -- diversification is important.

DX now trades on 4 times forecast earnings, despite a c.60% cut in forecast earnings per share. This rating, plus a 12% prospective yield, means DX shares are either a value trap or a spectacular contrarian opportunity...

Lamprell -38%

Dubai-based oil rig builder Lamprell boasts recently refurbished dockyard facilities and a hefty net cash pile. At the end of June, net cash was about 65p per share. The share price today is just 99p.

One possible reason for this is that Lamprell’s order pipeline could be drying up. The firm recently warned that the conversion of prospects to orders was slowing. The impact of spending cuts by oil majors and the firm’s Middle Eastern clients may be about to hit home.

I own the stock and think there’s an opportunity here, but I’m not sure about the timing.

Drax Group: -32%

Shares in Drax experienced a savage 28% one-day drop in July, a month after I commented that the shares might be worth a look. The fall was triggered by the government’s unexpected decision to remove renewable power generators’ exemption from the climate change levy. This decision is expected to cost Drax £30m in 2015 and £60m in 2016.

It’s not clear to me whether Drax will ever regain its historic earning power. Although the firm’s strong historic value and decent balance sheet are currently earning Drax a StockRank of 88, in my view it’s not a compelling buy.

Boohoo: +28%

Boohoo stock has gone up by 28% since I published a bearish article on the firm in August. So far, Paul Scott’s view that this is an outstanding growth stock at a reasonable price has proved correct.

I’m happy to defer to Paul’s expert understanding of the fashion business. However, my editorial brief when writing these articles is to focus on how the StockRank system can improve investors’ chances of beating the market.

Boohoo didn’t tick enough of these boxes to score well in August. It still doesn’t today, but the picture may be starting to change. If this year’s results match expectations, Boohoo’s decent balance sheet, strong cash generation and high momentum could make it a High Flyer (high quality and momentum).

Also rans

Other stocks which delivered double-digit losses after I commented positively were coal firm Hargreaves Services (-26%), iron ore giant Rio Tinto (-20%) and Reckitt Benckiser pharma spin-off Indivior (-17%).

So how did I do?

To get an idea of the overall returns from the 31 companies I’ve written about this year, I put each one into an equally-weighted fictional portfolio. Companies about which I was positive were represented by long positions, while those on which I was negative were represented by short positions.

Dealing costs and dividends were ignored. The stock’s performance was tracked from the publication date of the relevant article.

On average, the stocks I’ve written about are down by 2.1% so far in 2015. That’s pretty much level with the FTSE All-Share, which is down by 2.0%.

However, stripping out the four commodity stocks (RIO, HSP, DRX and LAM) brings the portfolio up to break even. Removing DX (Group) as well gives a 4.2% profit, 6.2% above the All-Share.

This seems to prove Warren Buffett’s adage that rule number one in investing is to avoid losing money. The profits will then take care of themselves.

However, perhaps the biggest lesson for me this year is the help the StockRank system can provide with entry and exit timing. Stocks with high QV ranks but poor momentum (e.g. Rio Tinto) have disappointed. Those with a more rounded QVM package have collectively delivered better results, more quickly.

In 2016, I will try to give more weight to momentum, and rein in my instinctive preference for value and quality.

In the meantime, I’d like to wish you a happy new year and all the best for 2016.

Disclosure: Roland has long positions in Lamprell, Rio Tinto and Hargreaves Services.