Magic Hat – XLM in, ERM 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.

It’s that time of the month again.

ERM leaves the portfolio by rotation, having gained 14% during its tenure. That’s slightly less than the Footsie (at 17%), but more than the FTSE250 (at 6%). The Footsie has had a good year. There are lots of exporters and and resource/energy stocks in the Footsie, so who knows, the large caps may beat the small caps again in 2017.

A page that is well worth an occasional check is the Stockopedia index list: http://www.stockopedia.com/index-prices/. The Footsie is on a trailing PE of 20.0, which seems “high enough”, I would have thought. Mid-caps are on a PE of 16.7, which is much more reasonable. Mid-caps are up 63% over the last decade, compared to only 16% for the Footsie. It really does seem that the smaller companies have a greater potential for growth.

The cheapest index is the Fledgling, on a PE of 12.1. You may think that some of the constituents are far too small to invest in, though. The small-cap index is trading on a PE of 14.8, which is very reasonable. The market capitalisations are likely to make them more appealing.

But back to business.

XLM enters the Magic Hat Portfolio. Keen readers may remember that I expressed reservations about this business. However, at least one well-respected investor seems to like it, so I’ll give it a chance in the MHP. I don’t own it myself, you understand.

What is very interesting to see in the Greenblatt Screen is the appearance of socks and pants retailer NXT (Next). Thankfully I managed to dodge the bullet on their profit warning. I will follow up in 6 months time to see how they have performed. I switched to SGP (Supegroup) – a company on which I made a fat-fingered sale on some time ago. The share price languished in 2016, but seems to be picking up steam now. I bought at a PE less than 18, and we’re expecting double-digit growth. Should be OK. I can’t bring myself to buy BOO on a PE of 59. Still, investors think it may be the next ASOS, and it certainly looks as if it is heading that way.

I think the lesson for me is that if I think I have a weak straggler, then don’t muck around, be aggressive and give it the boot.

LMI (Lonmin) is going gangbusters, and I have a small position there. I would have bought more if it weren’t for the fact that my money was stuck in transit and the price had already gone absolutely bonkers. The company is not without risk, however. There are noises about its licences being revoked due to criticisms over its housing commitments. The company has expressed confidence in having put forward satisfactory proposals, though.

Stay safe out there.

I’ve still got my JRS (JPMorgan Russian Securities). Stocks still look incredibly cheap there, Trump seems keen on getting into bed with Putin (hope that hasn’t put you off your lunch), and growth prospects look OK, too.

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About mcturra2000

Computer programmer living in Scotland.
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