Magic Hat portfolio: LRM in, SMWH out

The Magic Hat portfolio on Stockopedia ( is an experiment by me to see if a human can improve on a mechanical Greeblatt Magic Formula screen. I am trying to weed out “mistakes” that I feel the screening commits: unseasoned companies, scams, foreign companies (particularly Chinese), fishy accounting, and statistical quirks. Apart from that, I am agnostic as to the sector the company operates in, although I will try to avoid heavy concentration in any one sector. I will mostly apply “Strategic Ignorance”, by which I mean that I wont try to be clever in my stockpicking. My picking will be mostly mechanical. A summary of most pf my Magic Hat articles can be found on the web page This will allow you to tell, at a glance what shares have been bought and sold in the past, as well as what shares have been rejected from consideration and why.

Specialty retailer SMWH (WH Smith) was ejected from the portfolio because it is the only stock in the portfolio that has not been selected originally as a Magic Formula stock. It was bought on 07-Jan-2013 at 629p, and sold today at 1070p. That’s a gain of around 70% in less than 2 years. I can live with that.

Software company LRM (Lombard Risk Management) enters the portfolio. It passes 4 Stockopedia screens and has a stock rank of 99. It has a Piotroski score of 8, a return on capital of 24.6%, a PE of 7.2, an EV/EBITDA of 5.25, and P/FCF of 7.08. It has a ROC of 370.8% and an EY of 14.0%. Those look like good odds. It is a stock that was selected by “the red corner” for 2014. The link to his 2014 portfolio is . That page contains a link to his excellent write-up of the company. I suggest you check it out.

The Magic Hat portfolio is acquitting itself rather well against Stockopedia’s reference portfolio. The Greenblatt portfolio has been savaged over the last 6 months, having dropped 10.9%. The selection made for my fund have dropped only 4.3%, although this is still more than the FTSE 350. Over 3 years, my fund has increased 34.6%, against the FTSE 350 of 30.8%. That works out at an annual outperformance of less than 2%, which is not impressive. Note, however, that the portfolio was formed in February 2011, before there was a savage drop in the markets. The FTSE 350 is up 10.0% during the whole period, whilst the fund is up 34.5%. So the performance looks better. Cynically, it’s all a question of choosing the “right” start and end-points.

TV gambling company NPT (Netplay TV) is the worst performing company held in the portfolio currently. It is down 3.7% today despite strong gains in the overall markets. It is down 20.9% since purchase. I pointed out at the time that my track record with gaming stocks is atrocious. NPT has not disappointed me in disappointing me. I have come to the bitter conclusion that gambling stocks are uninvestable. I might make an exception for Ladbrokes and William Hill. The others just land you in a lot of trouble. There’s so many competition, political, regulatory, tax and corporate governance issues that make the sector such an investing minefield.

The median EY (Earnings Yield) for Stockopedia’s Greenblatt portfolio is 20.5%. I expect satisfactory returns given the value that is on offer.


About mcturra2000

Computer programmer living in Scotland.
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