Magic Hat: DFS out, COST in

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.

Upholstery retailer DFS leaves the portfolio by rotation. This share annoyed me. It had a profit warning in June 2017, sending the shares to around 200p. If I had held them personally, I would have bailed at that point. It would not have been a bad decision, as the shares are now at 180p. The portfolio made a 26% loss on the shares.

DFS no longer qualified for the Greenblatt Screen when I made the decision to sell. However, there seems to have been an update to the screen since then, and the company now qualifies. It has a Stockopedia stock rank of 65, so I am not sorry to see it leave.

SCS, another furniture retailer also qualifies on the Greenblatt Screen. It’s share price action has been the opposite of DFS. It has a stock rank of 100. I would normally expect companies within the same sectors to move in unison due to the similarity of economic forces and market perceptions. That has not happened here, though.

Construction & Engineering company COST (Costain) enters the portfolio, having a stock rank of 97. Let’s hope it fares better than DFS. I don’t know much about the company. It describes itself as a “technology-based engineering solutions provider”, which is really just nonsensical marketing-speak. Why are companies so bad at communicating? I take it that they do similar stuff to Carillion and Interserve. Hopefully this one won’t blow itself up whilst it’s in the portfolio. My rules are largely mechanical, so I tend to go with what is given.

I notice that BATS (British American Tobacco) is in the Greenblatt Screen. It is on a PE of 13.6 and has a yield of 4.8%. Its EV/EBITDA is 4.7, making it look seriously cheap. Share momentum is poor, and it has a Stock Rank of 39. I was tempted to choose BATS to enter the portfolio instead of COST, overriding the stock rank scores. In the end, I decided to stick with the ranking system.

Still, BATS does look good, and that’s a nice chunky dividend.

Fag company IMB (Imperial Brands) also looks good value. Its shares have been declining since April 2017. It has a PE ratio of 9.7, and a dividend yield of 7.5%. It is also the top holding of the LF Woodford Equity Income Fund (https://woodfordfunds.com/funds/weif/portfolio/), having displaced his perennial favourite AZN (AstraZeneca).

I have seen commentators suggest that the market has been trading momentum for an extended period of time, suggesting that the tide is about to turn. The market has stalled since the beginning of the year, so maybe it is about to switch tactics. Woodford tweeted recently: “We may now be in the foothills of a profoundly different market environment”. He also stated “UK equities are unloved and under-owned, globally – this represents an attractive contrarian opportunity in our view”.

Does anyone have any thoughts of this? Do you think that momentum has gone on too long, and that the market will switch to value?

Companies like BATS and IMB are paying good dividends. Drug companies like AZN and GSK are paying good dividends, too: 4.2% and 6.2%. Stockopedia records that the trailing PE ratio of the Footsie is 15.6. Another site (Star Capital) gives the CAPE of the UK market as 16.2 Although that does not “prove” that the market will not go down, it does suggest to me that we should not be concerned with the current valuation levels of the market, or that the bull market has gone on “too long”.

Maybe a major economic event will occur that will completely change all that. Anything is possible. Still, based on what we can see, I am not concerned. The US looks expensive, though. On the basis of CAPE, it is twice as expensive as the UK market. So it’s pushing the extremes. Woodford’s view does certainly seem to hold merit, in my mind.

The Magic Hat portfolio reached a high in May 2017, and then fell sharply until August 2017. I figured that the portfolio had a good run, but that its luck had run out. That pessimism proved unfounded – at least for now – as it is now at its record high. If value does come back into fashion, then I am hopeful that the portfolio could still outperform over the course of the year.

We shall see.

Stay safe out there.

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About mcturra2000

Computer programmer living in Scotland.
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