Stockrank 0-10 and 10-20 outperformance

7th Sep '20 by nickwild

13 comments 1351 reads

Has anybody analysed why the bottom two deciles have outperformed so dramatically over the last 6 months?

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Nickwild

Premium Member

13 comments

HumourMe

7th Sep '20

Interesting question. Looks to me, at a very superficial level, as being a combination of mean reversion and momentum. Zooming out to two years shows a widening gap for 0-20 possibly priming them for some mean reversion. With Covid they appear to have fallen proportionally less. They then bounced back at about the same rate, but as you say they then continued as the other quintiles flattened. I suspect that looking at sector proportions by quintile might give a clue.

Gromley

7th Sep '20

Interesting question Nick,

I hadn't spotted that (been looking at other things lately).

It is certainly a small cap effect. Here is the 3 month chart for the quintiles for Market Cap > £10m

But the effect is entirely gone if you look at the same picture for market cap > £350m

So the effect is being entirely experienced in the £10-350m category as this last chart shows (you could potentially narrow it down further)

Low market cap low stockrank stocks are often pre-profitability story stocks.

Just doing a quick screen for this market cap grouping shows 26 stocks with a 3 month price change of > 100%. 14 of these have SR in the 0-20 range and a few others are only just above 20 so may have been below 3 months ago,

It's actually quite a mixed group of stocks but there are quite a few pharmas such as Redx Pharma (LON:REDX) at +360% and a number of digital businesses such as £7DIG +1233% .

This a bit superficial, but it looks like it is an impact of story that might be expected to do well (or actually are doing well) out of the Covid crisis.

I would think it probably too late to benefit from this and I would certainly be reluctant to hold any of this big risers now unless there is clear evidence of the benefit they are/will be seeing.

Gromley

7th Sep '20

Incidentally top of that screen is £GR1T with +8,567% , but actually it looks to me that there has been a 100:1 stock consolidation which would suggest it is actually down about 5%.

That could also have influenced apparent performance.

underscored

7th Sep '20

Small cap biotech/pharma with COVID news?

sharw

7th Sep '20

With regard to Grit Real Estate Income (LON:GR1T) it is even more complex - the quote has changed from US$ to GBP. Not only can Stocko not cope with that but the RNS screen is blank so I had to go elsewhere to find out:

https://www.investegate.co.uk/...

Never mind, it means that it qualifies for the Price Momentum Screen while it is waiting to be sorted.

sharw

7th Sep '20

Oops - should have written GBX for pence

Edward Croft

7th Sep '20

In my opinion, it's due to a few factors.

Firstly this has been a risk-on period and you see what's known as a Tortoise & Hare effect. When we launched the RiskRatings & StockRank Styles we did some work on this and I'm probably overdue doing an update. In strong market rallies more highly speculative stocks (hares) tend to outperform while more conservative stocks (tortoises) tend to underperform. This is an inversion of long term normal market returns where low volatility stocks dominate. The low ranking set of stocks is quite dominated by speculative micro-caps which often rally fast in risk on periods.

Secondly, higher ranking stocks have a greater proportion of profitable cyclicals. These have been quite negatively impacted by the lockdowns and resultant hits to profits.

Thirdly, there's the macro factors: money printing (gold stocks have done well) and healthcare investments (biotech).

----

I was looking at the FTSE Aim All Share vs the FTSE All Share. AIM has completely dominated the main market stocks this year. It's the same effect really... speculative, lower quality stocks are winning.

----

To be honest, I'm surprised it's taken so long for there to be a significant inversion period in the rankings. I would normally expect it to be every three or four years.

Gromley

8th Sep '20

Thanks for that sharw - I hadn't looked further myself and I suppose these days a change from USD to GBX is not far from a 1:100 change ;-)

It never ceases to amaze me that providers of financial information (and I don't just mean Stocko - other platforms have this wrong, so the issue clearly originates earlier in the food chain) do not apply even a modicum of automatic sanity checking with the data feeds.

It is one of the first things I consider when assimilating a new data source to any data repository.

A price change of 2 orders of magnitude overnight is surely worth a red "you better see if this needs fixing flag".

Coupled with that, it appears that the StockReport still has the market cap correct , so a simple comparison between shares in issue, share price and market cap would capture any issues like this.

#trustnoone

car2000

10th Feb '21

The trend has continued on for another 5 months since this post was written.

I have an alternative idea for why it is happening. The big quant funds (i will not name them) are forced sellers at the moment due to client redemptions. These low stockrank stocks would be their natural shorts and so the redemptions are artificially pushing up prices. Any thoughts?

Rusty2

10th Feb '21

Is the AIM not a weighted index? If so it will probably be dominated by a few large shares such as ASOS (LON:ASC) and Burford Capital (LON:BUR) both of which have done since March 2020. The All share index is partly weighted down by large companies that are not performing well such as £BP, Royal Dutch Shell (LON:RDSB), Unilever (LON:ULVR), GlaxoSmithKline (LON:GSK) etc.

DamianB

11th Feb '21

This was a significant phenomenon in 2020 in Australasian markets. I noted it here with some charts that at the time I found quite striking
2020, strange year in Australasia for factor performance? (and hello)

Possible partial cause: the market doesn't always care about metrics of value or quality etc. It cares about the future. 2020 gave a novel and evolving macro environment that changed the future vison. And those companies that fulfilled that possible future were bought and appreciated in share price.

Apparently this is close to something called "story stocks"... which, apparently, is commonly scorned. I'm old to markets but new to company evaluation... so I have no bias or opinions. And I remind myself regularly that I have made very meaningful money by [almost accidently] holding large amounts of companies that became story stocks long before they gained merit per various metrics.

Rusty2

11th Feb '21

Maybe a lot of the low ranked companies are benefiting from government support?

Looking at the Altman short screen that has really taken off since March 2020. https://www.stockopedia.com/screens/altman-z-score-screen-4/

TimeAndTide

11th Feb '21

There are quite a lot of value stocks around which dropped to really very low valuations, they just seemed to go down and down without limit - they started coming back a few months ago. My stocks like that were disproportionately badly hit in the drop early in the pandemic and have come back disproportionately fast.

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Stockrank 0-10 and 10-20 outperformance

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Nickwild

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