The MHP (Magic Hat Portfolio) on Stockopedia (http://www.stockopedia.com/fantasy-funds/magic-hat-463/) 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 of my Magic Hat articles can be found on the web page http://www.markcarter.me.uk/money/greenblatt.htm This will allow you to see, 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.
Airline operator DTG (Dart Group) was on Stockopedia’s Greenblatt Screen earlier this week. For that reason, I am going to keep it in the fund. It has a StockRank of 100. I am rather top-heavy on airline stocks at the moment. It’s an unbalance that may lead to my undoing.
The Magic Hat fund appears to be beating the robotic Greenblatt screen and the FTSE350, although the out-performance is not outstanding. Many private investors would have done much better. One problem with the Greenblatt screen is that it is very volatile, despite having more holdings than the Magic Hat portfolio.
There is a lot of dubious merchandise in the Greenblatt screen. For example: Kcell, a Kazakhstan telecom, Mail.ru, a Russia-based internet company, Novorossiyski, a Russia-based seaport company, Orascom, an Egyptian telecom, Pharmstandar, a Russia-based pharma, and so on.
According to StarCapital (http://www.starcapital.de/research/stockmarketvaluation), the CAPE of Russian stock is 4.7. That probably explains why a lot of Russia stocks are appearing on the screen. Low CAPEs are usually associated with high subsequent returns. So we may see a rebound in the Greenblatt screen. The operative word here is “may”.
Brazil has the next-lowest CAPE, at 8. JPMorgan have investment trusts operating in both Russia and Brazil, if anyone is interested. The UK has a CAPE of 12.8, which is probably OK. Japan has a high CAPE: 26.5. The US is on a similar number. I doubt that many are surprised that the US has a very high valuation, and that expected returns are therefore low.