According to The Globe and Mail (http://is.gd/CfG1gX), you can beat the S&P500 by 9.3% pa by investing in large- and mid-cap stocks that are heavily shorted. The gist of their article is that if you bought heavily shorted large and mid-cap stocks, you would have beat the S&P 500 by 9.28% each and every year. Market cap matters a lot, because with with the smaller names, negative returns were delivered.
The precise mechanics of constructing the portfolio has small variations from article to article, but the basic idea is to search for recovery stocks in a mechanical way: stocks that have high short positions, but which show high momentum , suggesting that the shorts were wrong in their analysis. Based on my findings in the Feb 2014 article, it appears that the strategy can work for glamour stocks as well as recovery stocks.
My webpage collating this information:
The results for the portfolio selected on 2013-08-05 is impressive. Here is their RS6m relative to the FTSE 100: HOME +14.6%, APR -12.9%, DXNS +0.4%, PIC +16.1%, IAG +33.7%. That’s a mean of 10.5%. I would be more than happy with outperforming the index over 6 months by over 10%. Over 6m, the FTSE 100 was up 0.9%, whilst the FTSE-ASX was us 1.9%.
I had said in my previous article in the series that I had rejected OCDO as an idea, on account of the fact that it seemed ridiculously overvalued. Too bad I rejected it, because its RS6m was 89.0%. I would have boosted my returns if I hadn’t employed some common sense! I also rejected DMGT (Daily Mail) because they were subject to a special situation, and there was a risk of misanalysis. I shouldn’t have worried, though, as the shares were up 26.2% relative to the index.
In the article, I also reported that the relative results for the preceding period were good, although the portfolio consisted of only 2 shares: HOME +18%, SMWH +13%. So the average relative performance was 15%. If you had followed my suggestion of shorting HMV, you would have done even better, on account of it going bankrupt.
Let’s assume that you didn’t do that, though. So the relative 6 month gain for the 2013-12-15 portfolio was 15%, and for 2013-08-05 it was 11%. So, an approximate annualised gain is about 26% (11 + 15). That is an excellent result, especially when the portfolio construction technique was mechanical, and within the reach of anyone.
Let’s see if I can score a hat trick with my next set of selections.
Here’s my selection criteria:
1. write down the first 50 highest shortest stocks, as reported by http://shorttracker.co.uk/
2. write down the market cap and RS6m for each company listed in 1 3. Eliminate companies that are “too small” (AIM-listed, although none passed)
3. Choose the 6 highest by RS6m
Here’s the selections: CAU GRG OCDO SMWH STOB TNI
Some of choices look a bit scary to me. OCDO (Ocado) valuation and business model makes my head spin, and I think GRG (Greggs) may be too boring to continue its momentum. We shall see.