Investing: let us make this simple rule

And that rule is: avoid investing in companies where the RS6m (6-month relative strength) is in the bottom decile.

According to some calcs I did in in November 2014 (, the bottom decile cut-off is at -15.6%, and the top decile is 25.4%. I discovered that companies that were in the top decile had nearly a 25% chance of being in the top decile over the next six months. The bottom decile had nearly a 28% chance of being in the bottom decile over the next six months.

Now, of course, that is only one set of data points, and it is worthwhile me repeating the experiment. But the message jumps out: you are placing the odds against you if you bet on falling knives. I bought shares in Lonmin, so trust me, I know!

Another case in point for today is SGI (Stanley Gibbons). According to Sharelock Holmes, its RS6m is -38% (as of yesterday). So the Market was giving you clues that things are not going great. SGI has a Stockopedia Momentum score of 35, which isn’t disastrous, but it’s not great, either. The company released a trading update today (, sending the shares down 28.9% as at writing. Paul Scott comments on it in his report (

I’m not overly keen on this company, but the profit warning here looks to me like fairly transitory issues, which are already being fixed. That’s important, as the nature of the problems determines if, and how quickly, the share price will recover.

simonty noticed a number of red flags in his post on 28-Jun-2015, and concluded (

It sits on 20x historic eps even with the adjusted figure, far higher if you consider some of the extraordinaries to be not so extraordinary. The asset backing is far less robust than is claimed. The stock levels are extraordinary and need to be converted into profit. Yet in the last year they have failed to sell more stamps and philatelic revenue was down c10% and actually lower than 2012. The MarketPlace is as yet unproven and anyhow generates a far lower margin on GMV than traditional philatelic trading.

I think the potential for SG to capitalise on its reputation has always been there. At a market cap of £120m, a lot of the upside is already factored in.

Over the last decade, the share price is up a pathetic 2.3%, compared with the Footsie of 15.2%. Let’s be honest, SGI is the kind of company that just bumbles along going nowhere in particular. It is terrible as a buy-and-hold investment. I see from Stockopedia that it issued stock of nearly £39.5m for 15m/e Mar 2014, and invested £29m in the same year for acquisitions. The operating cashflows for the 6 years presented on Stockopedia are a net negative. Terrible.

This may work as a value investment *IF* you can get your timing and pricing right, but I wouldn’t want to own it over the long haul. I, personally, seem to have more luck with better quality companies. SGI has a Quality score of 41, which is actually pretty limp.

It also looks like analyst forecasts are going to be out by a longshot, and will require a sharp revision downwards. So much for analysts.


Update 06-oct-0215: GrindertraderUK wrote an excellent post earlier on: (SGI) Stanley Gibbons – The Red Flags Were There. Well worth a read.

Update 08-Oct-2015: A poster on ADVFN wrote this interesting note about Stanley Gibbons:

Having had a quick look at their website this evening, the 175 most expensive stamps on their site collectively retail at circa £20m. So approx 50% of the value of their stock (after debt) is tied up in just 175 items. This is the apparently illiquid end of their business.

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Magic Hat portfolio: CCT in, LRM out

The MHP (Magic Hat Portfolio) on Stockopedia ( 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 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.

The Magic Hat portfolio is beating the FTSE 350 over a 1-, 2- and 3- year period. It has also beaten it over its entire duration. Stockopedia’s Greenblatt’s screen is ahead of the MHP over a year, but not over 2 years. Greenblatt’s screen is also ahead slightly over a 3-year period: up 25.8%, as opposed to 25.0% for MHP. So it appears, so far, that the machine is equal to a man; at least this man.

LRM (Lombard Risk Management) is booted out of the portfolio, having been held for a year. If I had continued to hold SMWH (WH Smith) instead of substituting in LRM, I would have done a lot better. LRM is down 7.8% over 1 year, whilst SMWH is up 48.8%. The All-Share is down 1.5% over 1 year.

CCT (Character) moved into the portfolio, having a Stock Rank of 97. Its cashflow statement looks OK. It looks as though the company has been repurchasing stock, too. CCT has a quality score of 98, suggesting that its inclusion in the Greenblatt screen was not just a fluke. If investors are interested in the Greenblatt portfolio method, then I recommend that looking at Stockopedia’s Quality score will provide a good sanity check. In fact, you could probably roll-you-own Greenblatt screen and look for Value and Quality scores of at least 80 apiece. The Stockopedia scores work on a broad range of statistics, so I expect that they will be more reliable.

CCT is “engaged in the design, development and international distribution of toys, games and gifts. Its operates in the United Kingdom and the Far East.”

I notice that the share price has flatlined since the beginning of September. Its Momentum score is 90 – a good sign – and it RS6m is 61%. So there seems to be quite a good bit of momentum behind this company, but with some plateauing recently. If I put on my Technical Analyst hat, I would say that we have had a nice period of consolidation, and it may have built up a good bit of energy for another move upwards. BWTFDIK.

Anyway, it goes in, and we shall see.

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CBUY – Cloudbuy – resumes listing

CBUY (Cloudbuy) is “a United Kingdom-based provider of an integrated software platform for e-Procurement and e-Commerce for the trading of goods and services between purchasers, such as public sector bodies and their suppliers, along with the analysis and coding of spend and product data.”

I had only been vaguely aware of it, although I undoubtedly suspected it to be total junk. Paul Scott noted in his report on 11-Sep-2015 ( that its listing had been suspended due to the resignation of its Nomad. His verdict:

This company doesn’t really deserve to survive – it’s had long enough to make its business model work, and has squandered so much shareholder cash, that perhaps it would be better if it’s put out of its misery? So management probably have one last chance to make their impressive-sounding, but commercially poor business model actually work, in the next few months.

It resumed its listing today, closing down 27.7% to 13.55p as at the time of writing. Ouch.

The company issued a couple of other RNS’s today. One was an announcement ( that:

Ronald Duncan, Chairman of cloudBuy, has terminated and settled with immediate effect, the share sale and repurchase agreement (the “Repurchase Agreement”) first announced on 27 October 2014, between Equities First Holding LLC (“EFH”), himself and the Company.

Accordingly Mr. Duncan is no longer interested in the 2,250,000 ordinary shares that were transferred to EFH pursuant to the Repurchase Agreement announced on 12 November 2014.

As soon as I read “Equities First Holding”, I realised that this company was doomed with a very high degree of confidence. A sale and repurchase agreements like this is a form of “equity death spiral”, which, as you can imagine, does not end well.

There was also an announcement ( of a director purchase:

Ronald Duncan, Chairman of cloudBuy, has purchased 50,000 shares of 1 pence each in the Company at 15.4 pence per share for the benefit of his SIPP.

So, that is a purchase of less than £8k. No doubt this is an attempt to send a bullish signal to the market. Contrary to this, I interpret such a small purchase as an extremely bearish sign.

I also note that there is an RNS issued on 09-Sep-2015 (

the release of its half year results for the period ended 30 June 2015 has been delayed

This is another bearish signal. Companies with great results generally do not delay their accounts.

After having made only a cursory glance at this company, it is absolutely clear that it is, and was, completely uninvestable, and that shareholders were likely to have had plenty of warning signs and been able to get out in plenty of time.

There are so many other warning flags about the poor quality of this company. It is listed on AIM. Also, look at the cashflow statements, as presented on Stockopedia. The company has only reported cash outflows from its operating activities, and it issued a fair amount of equity. You can also look at the discussion threads on Stockopedia. Paul Scott, or others, may have reported on it, and provided valuable warning. Here’s what he said on 30-Mar-2015, months before the company was suspended:

based on performance so far, I can’t see any evidence at all that there is a viable business here

I think there is great value in looking through very poor companies. You will spot a lot of danger signals, and it will temper any bullish rationalisations one has.

If I had shares in this company, I would sell now, and take any price offered to me.

My verdict: dead man walking. This will go lower. Let me see in 6 months time.


Update 07-Oct-2015: Some posters are speculating on ADVFN that CBUY will have a placing at about 5p. I’m guessing that even this will be a hard sell, and likely to be unfeasible. The “sale and repurchase” agreements set up by the directors are basically “sale and NO repurchase” agreements. Effectively, directors are bailing out on this company. It seems like an act of desparation. If the company were truly considered viable and undervalued (why would they sell if it was undervalued?), they could perhaps negotiate a private placing of their own shares with an institution. The EFH deal, is, in my opinion, the company’s death warrant, and it’s difficult to see the instis getting involved in any placement. This is all purely my speculation of course, and I am interested to see how this will all play out.

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GNG – GEONG Int’l – suspended from trading

London South East reports that GNG’s shares were suspended from trading on AIM on Wednesday (

The company late Wednesday said it faced an “unavoidable delay” in  providing some banking information, meaning its auditors were unable to sign off the accounts on time before the end of Wednesday, the last day the company had to post its interim results before being suspended.

“The board and the management will follow up with the banks as soon as  the Chinese national holidays are over on October 8, 2015 and will  provide the needed information to the auditors as soon as it is  ready,” it said.

Absolutely appalling. That’s the last we’ll hear from them, then. Game over.

Their nominated advisor, FinCapp, has resigned, causing the GNG to be suspended.

What a total disgrace AIM is. To think that the London Stock Exchange want to make it easier for Chinese companies to be listed.

Words fail me.

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WAND – WANDisco – still looks like a sell to me

I thoroughly recommend using Stockopedia’s portfolio tools. You could, say, have a portfolio for stocks that you own, where you keep a track of their stock ranks, for example. I also have another portfolio for stocks that I am interested in. If I see a company that is of high quality, I’ll probably put it in that portfolio. I can then review it monthly, where I might look at the yield, ROCE, and soforth, and maybe decide that something is worth buying. It’s a very handy way of keeping track of potentially interesting shares.

One such share, for example, is HLMA (Halma), a company that has a good track record, and high returns on capital. Its yield is rather low at the moment, as it is rather toppy in terms of valuation. The shares look like they’ve been coming off the boil recently, so you never know, it may come down to a much better valuation level, and I’ll take the plunge. If the stock’s quality rank is in the 90’s, which HLMA is, I take that as a further good sign.

One of the dogs that I am tracking out of interest’s sake is WAND (WANDisco), that does stuff like “big data” and software repos. A director of the company disabused me of the notion that “it was just another Github”. Yeah, OK, but it hasn’t helped investors.

I wrote about the company in late-April, saying that I didn’t like the share. The share price was 252p then, and 107p now. Ouch! At least I can call some of them right! Sometimes it’s not difficult, though. It has a Stockopedia Stock Rank of 5; rather a strong warning. Its RS6m (6-month relative stength) is -46%. Shares that perform that badly require special caution.

WAND qualifies for two of Stockopedia’s shorting screens, and the bankruptcy risk arrow is in the extreme distress end. Oh dear! Even the most lackadasical glance at the cash flows reveals a big problem. It has cash outflows from operating activities of £13.6m, and it invested £9.5m last year. As revenues increase, so do the losses. The ending cash balance was £2.5m.

It seems pretty clear to me that investors will need to stomp up more capital if they want to keep the game going. As one poster on ADVFN writes

Stay short, they’ll soon run out of money and in this current economic climate will either have to be extremely heavily discounted, or they’ll just go bust!! The gift that keeps on giving! From hero to zero!

Sounds about right to me.


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Four Ways to Forgiveness by Ursula K Le Guin – review – I gave up

“Four Ways to Forgiveness” (FWtF) is a collection of four novellas by Ursula K Le Guin. Frankly, I was disappointed, and I gave up on the book half-way through.

I borrowed the book from my local library. I was impressed by another of her works, “The Lathe of Heaven” (LoH). It has an excellent premise: a psychiatrist manipulates the subconscious of man whose dreams become reality, with devastating consequences.

I want my sci-fi to be plot-driven, with lots of original ideas. Whilst LoH gave me that, FWtF did not. They were character studies featuring relationships between men and women. So, I am sorry to say, FWtF was not for me, and I decided to abandon it half-way through, rather than trudge through to the end.

The reviews on Goodreads were uniformly positive, so what would I know?

Just my two cents.

Surely I can’t be the only one out there that thinks the book “wasn’t all that”, can I?

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LMI – Lonmin – what I should have done

I bailed out on platinum miner Lonmin awhile ago at around 26p – a huge loss on my original purchase price of 173p. I see that Lonmin is now around 15.4p, which is a very significant further fall. My decision to sell looks “good” right now, insofar as taking a hefty loss can ever be “good”.

It is entirely possible, of course, that we are in a capitulation phase for resource stocks, and that bottoms are being put in as we speak. Or, it could be that the old adage “it’s never too late to buy, it’s never too late to sell” holds firm. I simply don’t know.

But I will tell you how I could have played this far better. It’s simply this: stop trying to catch falling knives. Just because something looks cheap doesn’t mean it can’t get cheaper. Way cheaper. I think it is better to try to catch a share on the rebound, when there is some market strength, rather than guess (and let’s face it, it is a guess) where the bottom is.

I have been thinking about how one might do this:
* use Stockopedia to look for near year-highs. You can create a screen where “% vs 52w High > -5”, for example. That should be close enough. 52-week highs have been shown to be a good proxy for momentum.
* just use the Stockopedia Value-Momentum screen for a list of candidates. The screen has an annualised return of 22.2%. What are you waiting for?
* look for shares that are in the top quintile for momentum over a 6-month period, but appear to have bombed out over a longer term, say 5 years. A good rule of thumb is that if a company has a relative strength of 20% or more over a 6-month period, then that should put it near to the cut-off point for the top quintile. As near as, anyway.
* look for shares on their 52w lows (e.g. at, and then set an alert on Stockopedia or IG for when it hits its 52 week high. That way, you’ll obtain a list of candidates that are “bombed out”, and then you just wait until they are in recovery mode.

None of this is guaranteed, of course; it’s just an approach for what is hopefully a better strategy than catching all the falling knives. It should definitely help you avoid the Marconi’s and Woolworth’s of this world, that went down and down until they reached zero.

I still think you need to exercise selectivity. I think AIM shares are always going to be tricky. Try to look for the fully-listed companies; cyclicals making a comeback or recovery shares that look like they’re in with a fighting chance. You could have used that strategy on, say, Thomas Cook a couple of years back, when there were plenty of gains to be made despite reaching a 52-week high.

Just something for you to think about.

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