Magic Hat Portfolio: ITE in

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.

No ejections this month, as there was spare cash in the fund to be deployed.

ITE has entered the portfolio at 170p. “ITE Group plc is engaged in the organization of trade exhibitions, conferences and related activities. It operates Russia, Central Asia and Caucasus, Eastern and Southern Europe, the United Kingdom, Western Europe and Rest of World”.

ITE is a company that I had invested in the past, and made a tidy amount of money in. It has traded at a 52w high of 317.6p, so shareholders that bought in at around those prices are obviously none to happy. ITE now trading at a PE of 9.8, has a dividend yield of 4.6%, a price to free cashflow of 10, and an EV/EBITDA of 6.9. It has a ROCE of 46%. Those look like good odds to me.

The fund is now up to fully invested in shares that met the Magic Formula criteria. From December, I will start rotating the funds.

Although it is too early to draw any conclusions as to whether a human can add value to a mechanical approach, the results so far look encouraging to me. I had made two disasterous stock picks: HNT (Huntsworth) and NPT (Netplay). Despite that, the fund is beating the FTSE350 over all time periods except 1 week. Admittedly the outperformance has not been that exciting, and could easily be attributed to chance Over 1 year, the portfolio is up 0.8%, compared with the FTSE350 of -3.6%. Earlier this year, it was looking like the formula was smarter than me, but events have taken a radical change. The Greenblatt screen returned -14.4% over the period of a year, which will obviously be disappointing to people who invested in the formula. Unfortunately, the screen had a great ramp up, only to fall equally dramatically on the way down.

I have noticed that the fund would have performed better if I had simply not invested in the AIM shares. The AXX (FTSE AIM All-Share) has falled nearly 16% YTD – a huge loss – so my shares would have fallen in sympathy. What does does that prove? It’s difficult to say, because all the AIM indices have median PEs higher than the other indices, with the exception of the Techmark Focus Index. Now, you could say that the hight AIM PEs simply reflect the higher growth prospects of the constituents. But I’m not so sure about that. Over the last decade, the AXX has return -26%, compared to +48% for the ASX (All-Share). You might argue that I’m cherry-picking my data points. I don’t think so. The markets bottomed around the end of 2002. If you had bought at the beginning of 2003, you would be up 89% if you had invested in the ASX, but up only 19% if you had invested in the AXX. You might expect the AXX to have rebounded much more strongly from lows, on account of the more speculative nature of the companies. However, over the long term, this doesn’t seem to have done you much good.

As an aside, if you had invested at the beginning of 2000, the ASX would have returned 7%, whilst the AXX returned -63%. In this case, I am most definitely cherrypicking, because I know with hindsight where the top is.

Obviously, there are periods when AIM outperforms other indices. Notwithstanding that, it seems that a good way to underperform the broader market consistently is to invest in AIM. I think that there are a number of reasons to that, none of which will surprise anyone: poor corporate governance, less talented managers, fragile business models, outright fraud, business models that are too speculative or ultimately require too much capital and generate too little return, and investors behaving too speculatively. Did I leave anything out? I think that covers most bases.

In order to select ITE, I ran down the list of Greenblatt stocks, rejecting AIM, foreign companies (which mostly means AIM), stocks that I already have, sectors that I’m already invested in, and accounting anomolies.

A new company to the Greenblatt screen is JSI (Jiasen International Holdings), which has a ROC of 120% and an EY of 42%. In theory, that sounds great, but I have a number of problems with it as a company. Firstly, it IPO’d in July. I think that investors will be much better served by investing in well-seasoned companies, not new issues. I’m not necessarily saying NEVER invest in new issues, I’m saying ALMOST never invest in new issues. I had invested in Royal Mail, for instance, and bagged some nice profit. I also invested in TSB, which I still hold. It hasn’t exactly been shooting the lights out performance-wise, but banking shares are in the doldrums at the moment, and I will get some bonus shares if I hold on for a year. So I intend to hold. I’m also thinking about investing in an American spinoff.

The next thing I don’t like about JSI is its business description: “Jiasen International Holdings Limited (Jiasen), together with its subsidiaries, is a designer, manufacturer and wholesaler of wooden home furnishings, solid wooden doors and other wooden design solutions to both the domestic Chinese and overseas markets.” As soon as I see the word “Chinese”, my stomach begins to twist. The officers and directors are Chinese, too; a huge red flag, if you can forgive the pun.

JSI is listed on AIM. No surprises there. It’s still another negative.

Lastly, the numbers themselves don’t impress me. A ROC of 120%, EY of 42%, and cash around £30m (according to Stockopedia) mean nothing to me when I see these kinds of companies.

Median EY for the Greenblatt screen is 16.5%.

About mcturra2000

Computer programmer living in Scotland.
This entry was posted in Magic Formula Investing and tagged , . Bookmark the permalink.

1 Response to Magic Hat Portfolio: ITE in

  1. Pingback: Ben Graham’s rules | Mark Carter's blog

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