High momentum and shorts portfolio

PRO FORMA

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.

Reverse chronology on my WordPress articles:
2014-02-08 http://is.gd/VBOrLw – RS6m gain: -11%
2013-08-05 http://is.gd/TgV0qC – RS6m gain: +10%
2013-12-25 http://is.gd/E9QV46 – RS6m gain: +15%

My webpage collating this information:
http://www.markcarter.me.uk/money/shorting.htm

Selection criteria:

write down the first 50 highest shortest stocks, as reported by http://shorttracker.co.uk
write down the market cap and RS6m for
each company listed in above
Eliminate companies that are “too
small” (AIM-listed, although none passed)
Choose the 6 highest by
RS6m

RESULTS FOR THE PREVIOUS SELECTION

The RS6m for the last 6-month portfolio is as follows:
CAU -14%, GRG 6%, OCDO -40%, SMWH 3%, STOB -13%, TNI -7%
Mean -11%

In summary: a disappointing result, wiping out the decent gain in the prior selection. OCDO proved to be a disaster. I said in my previous post that it made “my head spin”. Those kinds of shares can be two-edged swords. They /can/ do very well, which is why I included it. Clearly, it was a case of momentum working until it didn’t.

GRG managed to outperform, despite me considering it to be “too boring”. The RS6m for highly shorted shares was generally abysmal. It remains to be seen if this trend continues, or reverses

SELECTION FOR THE NEW PORTFOLIO

The majority of heavily-shorted shares did badly over the last 6 months, so there were slim pickings this time. Here’s the selection, though:
AGK AMEC DIA GLEN INTU PFG

See you in 6 months time.

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About mcturra2000

Computer programmer living in Scotland.
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