Magic Hat – IHG in, FLYB+PRES out

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.

FLYB (Flybe) and PRES (Pressure Tech) are booted from the portfolio by rotation. FLYB made 5.5% profit for me, whilst PRES lost 43.5%. The portfolio was too heavily weighted towards airlines anyway, so I am grateful for reducing exposure in that sector.

IHG (Intercontinental Hotels) joins the portfolio as it passes the Greenblatt Screen. Fully listed companies are in the minority on the screen, and I think they are generally safer than the AIM outfits. Especially beware of the AIM companies that do not pay dividends that are ostensibly “cheap”.

The Magic Hat portfolio has beaten the indices on a 1-, 2- 3- and 5- year basis, which is obviously quite satisfying. No fireworks, though. The portfolio is down slightly on a 1- and 2- year basis which, I believe, is the first time it has happened on my monthly reviews.

On a completely different note, I believe that the bottom has been put in the miners. Companies like BLT (BHP Billiton) are on PBV of 0.44. Over a 5-year period, the Global Mining Index has moved from 125 to 52, a reduction of 58%. Consequently, I bought some BRWM (Black Rock World Mining) this morning. There is a lot of negativity in the sector. My track record with catching falling knives has been fairly abysmal, however, so I have not “done my brain”.

Speaking of falling knives, my JRS (JPMorgan Russian Securities) has been recovering quite nicely. I’m still not in profit, being down 6.5% on my purchase. I think it was down over 15% at one point. Russian markets are trading on a CAPE of 4.6 (http://is.gd/cE4PAd), which is absurdly cheap. Whilst, of course, I disliked being down a lot on the share, it seems that patience is paying off. Perhaps sometimes one needs a little faith.

I am also building up a few LTBH (Long Term Buy and Hold) shares. A couple of noteworthy ones are XPP (XP Power) with a yield of 4.2%, and IGG (IG Group) with a yield of 3.9%. They should be good long-term growers, with a nice divvie, and have good returns on capital. If you want to put together a similar portfolio yourself, I suggest screening for all of the following as a strating point:

  • average 5-year ROCE of 15%
  • dividends at least doubled over the decade
  • yield of at least 2.5% (maybe 3%)
  • Net debt no more that 3 times profit before tax. Preferably, they have net cash

You should get a good combination of quality, growth and value. I would not expect any of them to be “as cheap as chips”, and would probably become suspicious if they were. Not all of them can be expected to do well, but I expect a portfolio of a dozen of them to outperform in the long run.

So, are we at the top of a downward-trending channel, or do we expect the trend to break?

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About mcturra2000

Computer programmer living in Scotland.
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