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.
Stockopedia’s Greenblatt Screen has had a similar performance over 6 months and 2 years as the Footsie. It has outperformed it substantially over a 1 year period, however. MHP has managed to outperform the FT350 over a 1, 2 and 3 year horizon. Outperformance seems to have been at about 6% a year, which is OK, but not exciting.
KAZ (KAZ Minerals) and INDV (Indivior) are booted from the portfolio by rotation. KAZ showed a loss of 60%, whilst INDV had a gain of 26%. It is difficult to know if booting out miners is a good idea. KAZ has a PBV of 0.32, and it seems almost unbelievable that prices can go lower. As I have found with LMI (Lonmin), however, prices can go to 0, effectively. Everybody (in inverted quotes) sees the weakness of China as cause for yet more bad news for commodities. To paraphrase what one poster said on a BB about LMI, one day, some of these companies are going to be 100-baggers. That day is not necessarily now, though.
Looking through the list of companies in the Greenblatt Screen makes for depressing reading. Most are on AIM, and perhaps even more worryingly, they have had a relatively short period of flotation. I have tried to give preference to shares that are fully listed, and have been on the market for at least a decade.
I see many dangers in companies that have not been battle-tested, and it makes me suspicious the quality that is being picked up by the screen is illusory. Recent floats seem like grenades lobbed into AIM.
One such company is DX (DX Group), which became public in February 2014. Another company is GMD (Game Digital), which was floated in June 2014. GMD is a reincarnation of Game, a company that went bust. The model did not work the first time. The shares have gapped down a couple of times since refloat; something of an indication that it’s not working the second time, either.
With very little to choose from according to my safety criteria, that means that ERM (Euromoney Institutional Investor) enters the portfolio. According to Stockopedia: “Euromoney Institutional Investor PLC is a United Kingdom-based business-to-business media company, which is focused on the international finance, metals and commodities sectors. The Company’s divisions include research and data; financial publishing; business publishing, and conferences, seminars and training. Financial publishing and Business publishing consists primarily of advertising and subscription revenue. Conferences, seminars and training consists of both sponsorship income and delegate revenue. Research and data consists of subscription revenue. The Company owns more than 70 brands, including Euromoney, Institutional Investor and Metal Bulletin, and is a provider of economic and investment research and data under brands, including BCA Research, Ned Davis Research, and the market information providers, EMIS and CEIC. Its offices are located in London, New York, Montreal and Hong Kong. “
ERM also passes the “Richard Beddard’s Nifty Thrifty Screen”. This screen has actually been rather successful, which good annualised growth and modest drawdowns. Fingers crossed!
My selection is largely mechanical, and I have no insight as to whether ERM will perform well or badly. It actually has good long-term returns on capital, and no debt. So it does not look like a wacky bet.
As ever, we shall see.
05-Jan-2015 update: I have decided to trim DTG (Dart Group) and put it into ERM to make ERM a full holding. The portfolio is vastly overweight in airlines, and DTG in particular. It needs to be more balanced.