Two years ago, I created two mechanical portfolios
(http://is.gd/T0QqOo) – and I made a note to myself to do a follow-up.
At the time the Footsie stood at 5320. It now stands at 6605, for a gain of 24.2%, which is 11.4% annualised.
The two portfolios I constructed were “Cheap as Chips”, and “Tragic Formula”. I will go through each of them in turn.
CHEAP AS CHIPS
This was based on some of Ben Graham’s ideas, combining financial stability (Graham Gearing) with cheapness (Graham Ratio). Specifically: * GG = 100 x (Shareholders Funds-Minorities-Prefs) / (Fixed Assets + Current Assets) It was a way that Graham used to ensure that companies could be considered “sound”
* GR = mkt cap / Net Current Assets minus non current liabilities (including provisions) A low ratio implies that it is cheap.
Here is the selection I came up with, showing the epic, price then, price now, and percentage gain:
lloy 33.8 76.99 +127.8%
xpp 1330.4 1380 +3.8%
3in 120.5 138.95 +15.3%
xgt 40.06 10.00 -75.0%
metp 101.1 101 +0.0% (merger on 24 Jan 2013)
mail 1826.91 ? ?
cal 30.00 39.1 + 30.3%
hsv 462.6 258.6 -44.1%
I’m unclear what happened to MAIL.RU. I assume nothing good. If I ignore it for how, the mean return for the remaining portoflio is 8.3%, well below the return of the Footsie. I assume that if MAIl was included, the results would be even worse.
This portfolio was achieved by using Sharelock Holmes Greenblatt Rankings for shares with a market cap over £200m.
The results are:
msy 279.2 349.7 +25.3%
ckn 1169.8 1899 +62.3%
tlpr 364.8 339.1 -7.0%
atk 622 1180 +89.7%
azn 2778.7 3248 +16.9%
hfd 299.60 368.0 +22.8%
pic 94.2 309.7 +228.8%
pson 1097.2 1327 +20.9%
The mean gain is 57.5%, which represents a very acceptable
outperformance of 12.6% pa. Note that half the shares underperformed the index, though. The selection of PIC really boosted performance, and you would be up a more modest 33.0% if you had omitted it.
The MF (Magic Formula) returned a very tastey 25.3%pa over the 2 years, although this could have been largely due to a “killer pick”. The CAC (Cheap As Chips) portfolio was a very disappointing performance. The threshold market cap for CAC was lower, at £75m, compared to the MF, which was £200m. If I exclude the companies that were likely to below £200m, at the time, I would restrict myself to LLOY, XPP, 3IN and HSV; and I would have had a mean return of 25.7%. Somewhat better. It seems like there’s a lot of junk down at the lower capitalisations.
Here’s a list of Magic Formula stocks that I have chosen for next year. It uses Sharelock Holmes rankings, with a minimum market cap of £200m, and I have avoided duplicating subsectors. Here’s my list of 8: RNK – Rank Group – 161.1p – Gambling
IRV – Interserve – 535.2p – Bus Supp Services
SPT – Spirent Comms – 137.5p – Telecomms equip
LSC – London Security – 1700.1p – Bus Supp Services
KENZ – Kentz – 450.3p – Oil equip & services
HRG – Hogg Robinson – 76.00p – Bus Supp Services
AZN – Astrazeneca – 3311.6p – Pharma
BA. – BAe Systems – 449.2p – Defence
I’ll update you next year.