What worked in the stock market in 2015

2015 turned out to be a year of very mixed fortunes for UK investors. A sluggish performance by the blue chip FTSE 100 index - down by around 4.5% - told a tale of depressed commodity sectors and sliding prices at giants like Pearson, Standard Chartered and Rolls-Royce. Small and mid-cap indices did better but they weren’t immune from the occasional accounting scandal, alleged fraud and disastrous IPO. But there were great gains to be had in the right parts of the market.  Here’s a quick look back at some of the winners and losers in stocks and approaches in 2015.

Winners

Successful IPOs: Fever-Tree Drinks

Known for its high-end tonics and mixers, Fever-Tree Drinks floated on the Alternative Investment Market in November 2014. But the success has been the price gain through 2015 - rising by a staggering 244%. What makes that all the more remarkable is that Fever-Tree was one of a number of ‘dreaded’ private equity-instigated floatations. Often heavily indebted and sold a frothy prices, this type of IPO has been a disaster on many occasions (see HSS Hire below). But Fever-Tree has so far flourished as a public company. Private equity backer LDC, sold its remaining 10% stake in July and what now looks like a knockdown price. Fever-Tree currently has a Stockopedia ValueRank of just 1 out of 100, suggesting that its price could now be stretched. Yet its Quality and Momentum Ranks are in the top tier of the market. That gives Fever-Tree the profile of a classic High Flyer - but any slip ups in the growth trend could send the momentum crashing.

Small-caps shone

From an index perspective, the general trend showed that small and mid-cap stocks were the place to be in 2015. The FTSE 100 laboured under the weight of its bias towards oil and gas and mining giants. But the AIM 100, FTSE SmallCap and FTSE 250 are all on course to end the year in positive territory, with the FTSE 250 up by around 8%.

Factor investing outperformed

At the close of 2015, the highest ranked 10% of stocks based on Stockopedia’s factor investing inspired StockRanks hit a new high. This quarterly rebalanced portfolio of stocks with the strongest blend of Quality, Value and Momentum has now produced a 74% return since we began tracking it in April 2013. In early December Stockopedia CEO Ed Croft reflected on his 2015 20-stock “Naps” portfolio based on high StockRank stocks, which had generated 40% returns in the first 11 month of the year. You can read about the Naps portfolio here.

GARP investing shone

Jim Slater may have passed away on November 18, 2015 but his legacy of GARP (growth at a reasonable price) investing will continue to inspire British investors for years to come. A spirited City dealmaker who became a children’s author and investment legend, Slater’s small-cap, growth-oriented investment philosophy made him hugely popular among UK investors.  A focus on earnings growth, value, quality and momentum has made his strategy one of the most exciting to watch. Since Stockopedia modelled and began tracking it in 2012, the ‘Zulu Principle’ strategy has often held positions in some of the most dynamic and best performing stocks in the market. In 2015, the strategy has returned 29% in the UK, and an eye-catching 38% across Europe.

Losers

Disastrous IPOs: HSS Hire

Hire chain group HSS Hire is by no means the only disappointing new market listing of 2015; we could have picked on similar disasters like Entu, Poundland and AO World. But HSS Hire in many ways symbolises the potential hazards of investing in IPOs, particularly when a private equity seller is involved. Roger Lawson of ShareSoc called it right in an article back in January 2015, where he pointed out that HSS was highly geared and its historic growth profile was hardly inspiring. After floating in February, the company rapidly issued two profit warnings and ultimately saw its shares slump by 67% through the year. Our own Paul Scott covered the trail of disappointing news in his reports.

AIM accounting scandals

Shorting attacks have picked up in regularity over the past couple of years, and 2015 saw a particularly shocking example of how these attackers can detect problems. In the past, controversial companies like Blinkx, Plus500 and Quindell have been forced to defend their actions, make changes or sell up completely in the face of this sort of haranguing. But that was nothing compared to events at Greek IT firm Globo, which turned out to be a fraud. Months of speculation, red flags and outright calls of foul play (including by our own Paul Scott) ended with an expose by an asset management firm that that saw Globo implode. As Ed wrote at the time, Globo had become bulletin board darling with fundamentals that were simply too good to be true.

Bargain hunting slumped

Some mischievous commentators in the US have this year claimed that ‘value investing’ has stopped working. This, of course, is music to the ears of hardened value junkies, who know that a few years of underperformance will pass and that value will ‘out’ again in the years to come. But there is no argument that the traditional deep value bargain strategies of the likes of Ben Graham have been pummelled in recent years, and there was no let up in 2015. Looking for stocks at extreme under-valuations was highly effective back in 2012. Back then, Graham’s NCAV approach would have helped you pick up housebuilders for a song. But now the portfolio is dominated by micro-cap riff-raff, strays and value traps - and the bargain portfolios have paid the price. These deep value investing plans thrive in the recovery after a crash, without which 2016 looks fairly bleak for them.

Chinese companies disappointed

Small Chinese companies that choose to float on London’s Alternative Investment Market have been an enigma to UK investors. On one hand, China’s vast growth prospects and increasingly co-operative business culture offer some attraction. After all, the fund manager Mark Slater has proved that you can make a mint with Chinese stocks, through his holding of Hutchison China Meditech. On the other, opaque accounting (verging on alleged fraud in some cases), cultural and linguistic differences and a track record of de-listings make Chinese companies very difficult to deal with. Among the disasters this year was Naibu, a sportswear company, which effectively cut itself off from its non-execs and the rest of the market before being suspended. A similar situation appears to be unfolding at another UK-quoted Chinese clothing company, Camkids. You can read Paul’s view on Camkids here.

Watch out in 2016!

Small and mid-cap shares were strong performers in 2015 - if you managed to duck the story stocks, accounting scandals, shorting attacks and dodgy Chinese companies. And while it became increasingly difficult to find ‘value’ in the market, the blend of Quality, Value and Momentum behind Stockopedia’s StockRanks produced some excellent results. The bar has been set high for next yet. So how was it for you - what were your winners and losers?

Have a great new year from all of us at Stockopedia!