Magic Hat – DFS in, IHG out

The MHP (Magic Hat Portfolio) on Stockopedia (http://www.stockopedia.com/fantasy-funds/magic-hat-463/) is an experiment by me to see if a human can improve on a mechanical Greeblatt Magic Formula screen. I am trying to weed out “mistakes” that I feel the screening commits: unseasoned companies, scams, foreign companies (particularly Chinese), fishy accounting, and statistical quirks. Apart from that, I am agnostic as to the sector the company operates in, although I will try to avoid heavy concentration in any one sector. I will mostly apply “Strategic Ignorance”, by which I mean that I wont try to be clever in my stockpicking. My picking will be mostly mechanical. A summary of most of my Magic Hat articles can be found on the web page http://www.markcarter.me.uk/money/greenblatt.htm This will allow you to see, at a glance, what shares have been bought and sold in the past, as well as what shares have been rejected from consideration and why.

IHG is ejected from the portfolio by rotation. DFS enters. SPO was higher on the list, but it is the subject of a special situation, which is best avoided in an automated portfolio. It is not clear that the fund will correctly account for the changes.

I now have an even lazier way of selecting candidates to enter the portfolio: I look for Stock Ranks of at least 90. I still give preference to companies outside AIM, and avoid foreign ones.

IHG made an 18% gain for the portfolio, which I am pleased with.

MHP has been on a tear since November, outstripping the wider indices by a significant margin. It would not surprise me if much of the gains reversed over the next 6 months. What I notice about the MHP is that it steadily eaks out gains over the indices, and seems to hold onto them better in a downturn. The portfolio has not made Buffett-esque gains, but it has handily beaten the market. I dare say that compared to professional fund managers, it would be in the top quartile.

The indices have gained quite a boost from the recovery in commodities over the last year. The portfolio has not invested in them, so it is pleasing to see that the portfolio has outperformed despite this fact. Two stocks in the portfolio have doubled, and one nearly so. The fact that three out of the twelve stocks have more or less doubled is gratifying.

I have noticed that some stocks that I have sold from the portfolio have since gone on to perform well. That is why I emphasise that MHP is largely a robotic portfolio, so shares sold do not necessarily mean that you should sell. My suspicion is that you could hold shares for two years, rather than just a year, and expect to perform at least as well.

Stay safe out there.

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Stock screens, GOG, and CPR

Lately, I had been looking at creating some screens on Stockopedia.

Here are the performances of some of the most important scores on Stockopedia:

  • M (momentum) +128%
  • G (growth) +125%
  • V (value) +87%
  • Q (quality) +69%
  • FTAS (FT All-Share) +44%

As you can see, all the scores beat FTAS. Momentum lead, which does not surprise me, because I had discovered momentum to be a good performer on previous occasions.

The surprise performer is growth, which from time-to-time performed better than momentum. Growth is the least-respected score, both by Stockopedia and private investors generally. The presumption is that people tend to overpay for growth companies, which are either story stocks, growth that materialises but does not warrant the price paid, or is subject to gross misperceptions about the actual growth prospects themselves. It’s a fair assessment, I am not arguing with it; I am just pointing out that growth happened to have worked extraordinarily well, at least in the period under review.

It seems, then, that if you want to use the rankings to build a portfolio, you might use either just momentum, or a combination of momentum and value.

One idea for a screen I devised is to look for shares where EV/EBITDA was less than 7.5, and whose M score was in the 90’s. One company that almost qualified was bus company GOG (GO-Ahead Group). Its scores were: Q 95, V 84, M 86, SR 99, EV/EBITDA 3.82. Strictly speaking, of course, GOG failed on the M score, but it was close.

So GOG offered good value and good momentum. The fly in the ointment is that it issued its H1 results today, sending the shares down 13.4% to 1978p. They reported “full year expectations lowered due to challenges in GTR and a slowdown in passenger numbers in regional bus”.

If I held the shares and saw the market’s reaction, I would have bailed out, and concluded that momentum score was henceforth meaningless for this company. That’s not what I wanted to see, of course: devising a strategy in which a candidate share (almost) immediately blew up in my face. Perhaps it was just an unlucky break, and not necessarily indicative that it was an ill-conceived idea.

“Dearg Doom” wrote an article on Stockopedia a few days ago: “Knowing when to sell a stock is always difficult!”. I had expressed some of my thoughts about using SMA (Simple Moving Averages). The link to the article and comments is here:
http://ow.ly/7ltZ309rNs2

One chart that did catch my eye was CPR (Carpetright). Rather than reproduce the chart in the article, I thought it would be rather fun to try out Stockopedia’s new charting functionality. The chart is below.

What attracted me was the likelihood of momentum reversal. It’s momentum score is 14. A mere glance at the chart shows you that momentum is bad in any event. Its value score is 87. So here we have an interesting situation. The shares are cheap, the momentum has been bad in the past, but it is now trading above its 50dMA in what appears to be a reversal of trend. What’s more, on 31 Jan 2017, it issued its Q3 trading update, which raised the share price 8.8%.

CPR reminds me of DTG (Dart): terrible momentum, cheap, but with a trading update that caused a re-assessment of the company.

So I am going to stick my neck out and say that I expect the share price of CPR to be higher in 6 months time than it is now. Let’s see, shall we?

I own no shares in CPR or GOG. This is just for a bit of fun.

Stay safe out there.

CPR 208p. ASX 3953.

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Sold my HSBA

I bought HSBA (HSBC) in mid-December at 659p. The buy decision was as follows: on Stockopedia, I ranked companies with a market cap of over £80m by descending M (momentum) score. HSBA was on the first page, and it had an excellent divvie.

Earlier this month HSBA had a disappointing, but not disastrous, reaction to its results. Other banks reported around that time, and were on balance disappointing, too. As you can see from the chart, the shares declined, and breached the 50SMA (blue circle).

That was a decision point: did I expect support to hold, in which case the share price should continue its upward trajectory, or was support properly broken, in which case any momentum would be defunct?

The reaction to the trading statement suggested that it was likely to be a busted trade.

I don’t think you can afford to be too twitchy on these things, though, as you’ll be in and out of trades like a yo-yo. So I chose what I thought would be a support level lower down: 645p.

An alert was triggered earlier today, indicating that the price fell below that, so I sold. I managed to achieve a little over 645p, dealing costs included. So I lost 2.1% on the trade. Disappointing, but of course less disappointing if the shares decline more.

So, to sum up, I had concluded momentum was lost, and I expect further declines in the share price thereafter.

Note that this is by way of an experiment by me, not a recommendation. I will pick this story up in six months time to see how well I read the tealeaves.

Stay safe out there.

645p

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LRD – Laird – a terrible company

In December 2015, LRD (Laird) announced the acquisition of Novero, “a key supplier of integrated car connectivity”, for £47m.

Today, LRD published its finals, sending its shares down 7.%& to 162p in early trading. Although revenue is up 27%, operating cash flow is down 48%.

Net debt at year end increased from £200m to £344.6m, they have scrapped the final dividend, and announced a deeply-discounted rights issue to improve the balance sheet. The issue is 4 for 5 at 85p.

“The Novero integration is now complete and Novero is expected to deliver modest profitability in 2017”, according to their RNS. Let me paraphrase this: they blew £47m that they could ill afford on an acquisition that seems barely capable of scraping by.

According at Stockopedia, LRD’s ROCE has averaged 4.8% over the last 6 years. I am not surprised.

All I can say is that it is a lousy company run by lousy management. To be fair, a lot of management seemed to have been replaced, so I should reserve judgement on current management.

LRD has a value score of 82, and it will be an interesting case study in how the company performs after the rights issue. I am interested in seeing how it turns out.

Stay safe out there.

162p

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NCC – some notes

Software & IT services company NCC has had a very rocky ride lately. Shares peaked at over 350p in Sep 2016, and have since fallen to 89.60p as at writing.

The shares fell sharply when it reported in October: “The Group however experienced a number of setbacks in the Assurance Division including three large unrelated contract cancellations, a large contract deferral and difficulties with some managed services contract renewals.”

This seems to smack not so much of individual setbacks, but of some kind of systemic problem.

The shares declined further when they released their H1 trading statement in Dec.

On 11 jan 2017, Brian Tenner was appointed CFO.

On 19 Jan 2017, they issued their H1 , and the shares dipped a little. They also announced that the Chairman, Paul Mitchell, intends to step down on 31 May 2017.

Another plunge in the share price occurred on 21 Feb, when they issued their trading update and started a strategic review. The share price was ~180p beforehand. As you can see, the company has lost half its value in 2 days.

With the benefit of hindsight, all that boardroom shuffling looks suspicious.

A BB (bulletin board) poster said this:

Looks like they have been massaging their figures over time to continue high growth story.

I think that the poster is likely to be proved correct.

I am wondering if the accounts will be restated, too.

Stay safe out there.

89.60p

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PFD – Premier Food – the funny thing is

PFD (Premier Food), purveyors of such brands as Mr Kipling (I do like their cherry bakewells, BTW) has basically been an investing disaster for the last decade. It’s amazing for just how long the company has been on life support.

PFD seems to have been a product of financial engineering; buying brands at prices that did not offer decent returns on capital. The shares seemed to have hit a peak in 2005 at ~3400p (split adjusted), and then traded sideways until 2007, when the whole thing collapsed. The beginning of 2009 saw its shares trade at ~332p.

Although the shares did rebound partially, they have suffered a long steady decline since then. The shares now trade at 40.34p.

Here’s the interesting thing: the shares were basically uninvestable even in 2007. How come? The finals issued in March 2007 showed negative free cashflow, profit before tax of 58.1p, and net debt of £645m. The shares were visibly far too risky even at that stage, and investors could have bailed out at 2870p. The shares seem to have traded on a PE of 14: far too high considering the serious risks that investors were taking.

What is also interesting is that over the last few years, net debt has been decreasing, and it is actually generating free cashflow. The debt is still high, but things have been worse, and it has soldiered on regardless.

Will this company finally succumb to the inevitable, or will it produce a spectacular turnaround that will have everyone talking about it? I find PFD to be a fascinating company to follow.

Stay safe out there.

40.34p

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TCG – Thomas Cook – reading the tea leaves

I haven’t owned TCG for a few years now. It had been an excellent investment for me. I recall that I sold out at about 155p. The shares have had a poor performance since then.

I thought the recent chart on TCG looked interesting. TCG seems to have broken its downtrend (line sloping downward), and has since been in uptrend. After a strong upward move, the shares have been caught in a consolidation zone (rectanglular box).

My anticipation is thefore that the shares should break out of this zone on the upside. The fly in the ointment is the market’s disappointing reaction to their Q1 trading statement on 9 Feb. They did, however, report that the summer 2017’s booking were 9% ahead of last year.

The market reacted favourably to TUI’s Q1 results on 14 Feb, where they guided at least a 10% growth in EBITDA in 2016/7.

So things “should” be OK for TCG, fundamentally; with some qualification.

Chart-wise, the support level for TCG is about 85p, so we could see the share price dip lower from here. If the shares fall below, say, 82p, then I would take this as an indication of breakdown in support, with the next stop being 80p, and much lower if that level is taken out.

But I am going to predict that the share price will be higher 6 months down the line. I’ll report back then, and see how well the prediction was.

This post comes with a more than usual number of caveats: I do not own shares in TCG, and is really just a way for me to test my fundamental and technical analysis reading. So don’t take this post seriously at all. It’s just for fun.

Stay safe out there.

87.77p

Update 22-Feb-2017: I note that both Sharelock Holmes and Stockopedia have TCG on EV/EBITDAs of less than 4. This is a bullish factor.

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