IMT (Imperial Tobacco) get ejected from my fantasy fund over on Stockopedia today. The portfolio is an attempt to see if I can beat the Greenblatt Magic Formula screen. There is some way to go before I fill up the portfolio with Magic Formula stocks, so it is too early to see how I am doing. So far, at any rate, machine is beating man. That could be regarded as good or bad news, depending on your perspective. From an ego point-of-view, obviously it’s not looking so good.
IMT has an Earnings Yield of 4.81%, making it a good candidate for ejection.
In its place, I will choose HNT (Huntsworth), which has a much more reasonable earnings yeild of 10.5%. It is also technically oversold if you look at its RSI. Stockopedia gives it a value rank of 95, which is obviously cheap. The Stockopedia quality rank is 61, whilst its Return on Capital (Greenblatt’s measure of “good”) is 72. So, both quality measures are giving somewhat consistent rankings. A quality rank of 61 is perhaps no great shakes, though.
What does HNT do? Well, by rights, it shouldn’t matter too much, as the portfolio is largely based on quantitative rather than qualitative measure. But OK, to play the game … “Huntsworth plc is a United Kindom-based company engaged in the provision of public relations and healthcare communications services.” What does all that mean? Apparently it means that it delivers “a full spectrum of strategically-driven healthcare communications programs to healthcare professionals, patients, consumers and payer”, amongst other things. So, something to do with PR; and industry I loathe, because in my books, it’s basically paid lying.
It’s share price took a dive on the 29 April, upon the release of its prelims. So, presumably the market thought that their lying fell short of expectations. Skimming through the prelims, nothing caught my eye as being particularly bad. Like-for-like revenue was down 1.3%, and their adjusted diluted EPS fell from 6.9p to 5.6p. I’m too lazy to read the full statement, so I’ll cheat and look at what others wrote. Back in Novermber 2013, Paul Scott wrote about it over at Stockopedia: “potentially interesting”. OK, not much to go on, but he did mention their likely expansion into China, and thought that their net debt had moved down to more reasonable levels.
The share price has being going south since their late-April statement, and the thinking behind including it in the portfolio is that it offers sufficient value and quality, and is oversold, making it due for a rebound. That’s the theory, anyway.
One thing I did notice as I scanned through the Magic Hat portfolio is that there wasn’t anything on ludicrous valuations. For example, BSY (British Sky Broadcasting) is a huge company, with a (forward) PE of only 13.6, with 12.8% growth in EPS expected. Similarly, SMWH (WH Smith) is on a forward PE of 12.5, with an expected growth of 9.65%.
Now, I’m not saying that one can necessarily expect to make a fortune out of the stock market at current valuations; but it looks as though investors should be able to find a fair selection reasonably valued companies, not junk, with reasonable prospects, and in quite large caps, too. Maybe the market has topped – I don’t know – but based on even just a casual glance at the kinds of valuations that I can spot, the whole idea of a top is being thoroughly embedded in current market psychology when, actually, there’s some sensible stuff out there. So, beware the doomsayers. It might not happen.