February Magic Hat Portfolio

Two days ago I said (http://is.gd/vQjAjv) that I had bought some FLYB, and adjusted my Magic Hat fantasy fund on Stockopedia
(http://is.gd/ySBRN6) with another Magic Formula stock. I’m pleased to say that FLY has been rocketing since I bought it, and long may it continue. But I digress …

My Fantasy Fund is an attempt to beat both the All-Share and Stockopedia’s Greenblatt Magic Formula portfolio. There is some slight evidence to suggest that my fund is beating the benchmark index, but not much. Over a 2-year timeframe, the portfolio is ahead of the index by about 7%. Nothing to get excited about. It should also be noted that sometimes there can be performance quirks that mean that the results can look a bit skewed from what I would normally expect. I’m not suggesting that that’s anything to do with Stockopedia – just that the market behaves in odd ways sometimes. I think my performance is somewhat flattered by the fact that the FTSE350
has had a nasty last couple of weeks, whereas my portfolio has weathered the storm rather better.

As I reported previously, I decided to sell restaurant chain $RTN.L (Restaurant Group). It more than doubled during the holding period, and it certainly fitted well when I was running the fund as a defensive portfolio. RTN had good growth and quality characteristics, so perhaps we shouldn’t be too surprised that the share price had a very respectable run. Stockopedia reports that it has a PE of 20, which seems to me to be “somewhat toppy” given the type of company it is. Good company, though.

The sale of RTN was to make way for oil exploration and production company $DGO.L (Dragon Oil). According to Stockopedia, It has a ROC of 46.0%, and an EY (Earnings Yield) of 27.5%. Cash balances at 31 Dec 2013 was US$1.9b (£1.2b), according to the company. It looks like that includes $2.1b in “short term investments”, which appear to be term deposits. Considering that DGO has a market cap of £2.9b, that’s a lot of cash. Stockopedia reports that it has an EV/EBITDA of 2.8, perhaps not surprising given the amount of cash it has. The EV/EBITDA is very low compared with the sector in general, and the market as a whole. The sector media is 7.8, so I would hope that there’s a considerable scope for a re-rating.

Of course, the world economy could fall off a cliff, causing oil prices to crash, and make a complete mockery of even ostensibly low current valuations. My record on resource stocks has been, um, “mixed”, so by including it in the fund, there’s a risk that the share “doesn’t do the right thing” for me.

What I am beginning to do is keep track of RNS statements for Magic Formula stocks throughout the month, and seeing how the market reacts to them. The theory is that good reactors should do well, and the bad reactors should underperform. That’s just a theory, of course.

If shares are cheap, and drop on results, then I begin to smell a rat. Take FIF (Finsbury Food), for example, which reported results on 24 Jan, sending the shares down 5.9%. I see that they are down a further 4.9& today, to 47.1p. Ouch. Revenues had declined slightly, whilst the cost of ingredients increased. Clearly, the market wasn’t impressed. analysts have pencilled in some strong growth for 2015, but I’ve not checked how old those estimates are. So they may go down.

DGO is in a happier place, though. Its drilling production update on 9 Jan sent the shares up 1.06% against a market that was down 0.42%. Their trading statement on 14 Jan received a cooler reaction but they did say that they targeted a growth in average gross production of between 10-15% in 2014.

We shall see.

Edit 15:41 I forgot to mention, DGO was identified by Boros10 in his Stockopedia article “One Way to Become an ISA Millionaire”: “Shares in our ISAs which currently meet (or have met) my QARP criteria include Bioventix (BVXP), Dragon Oil (DGO), Euromoney Institutional Investor (ERM), Judges ScientiShares in our ISAs which currently meet (or have met) my QARP criteria include Bioventix (BVXP), Dragon Oil (DGO), Euromoney Institutional Investor (ERM), Judges Scientific (JDG) and IG Group (IGG).fic (JDG) and IG Group (IGG).”

Edit 15:48 Also worth mentioning is that ExpectingValue as posted an article recently about FIF. As usual, the quality of the article and comments far exceeds anything I could offer. Also, EV is looking for a job, so if you are on the lookout for an equity analyst, be sure to check out his blog.

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About mcturra2000

Computer programmer living in Scotland.
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