Tuesday 29 April 2014

Has the Mo' Train derailed?

Momentum not doing well in recent months


Momentum is an important ingredient of the Mechanical Bull strategy. Along with value and quality it is a key set of factors that underpin Stockopedia's StockRanks. Also, 9 out of Stockopedia's 65 Guru screens are classed as momentum strategies.

These strategies have not done well in recent months. Over the last 3 months only 3 out of these 9 strategies have made gains compared with a 3 per cent rise in the FTSE All Share. Over the last month, they have performed even worse. Only one strategy showed a gain compared with a 1.7 per cent increase for the FTSE All Share.

Doing better over the longer term


The longer term picture looks much better. Over the last year, all 9 momentum strategies have trumped the FTSE All Share. This suggests that momentum strategies are effective over the longer term but that there are periods, such as now, when they will underperform.

I am fairly certain that the derailing of the Mo' Train is the most important factor in explaining the poor performance of the Mechanical Bull portfolio over the last few months. It is down 0.8 per cent over the past month compared to a 1.7 per cent gain for the FTSE All Share.

Lack of any current investment trends


Looking at the performance of Stockopedia's GuruScreen Composite Performance over the past month, momentum strategies are down a dismal 4 per cent. However, it is interesting to see that the FTSE 100 actually beats all other composite strategies during April apart from "value" strategies, which did only slightly better.

This suggests something rather odd is going on with share price movements becoming detached from any underlying investment trends. One possibility is that the very strong performance of these guru screens since the middle of last year has led the markets to look for a reason to cement these gains. The current crisis in the Ukraine might just be such a reason.

The Return of the Mo' Train


So what now for the Mechnical Bull strategy? Although its been two pretty disappointing months in a row, I remain confident in the basic concept. Indeed, what these last few months have shows is that things could easily have been even worse. There is an increased risk when following a single set of investment factors but this can be reduced by combining set of factors.

The Mo' Train may have derailed for a short time but I am confident it will come back on track at some point. Next month will be the one year anniversary since my launch of the Mechanical Bull portfolio. Let's see whether it can end the year on a high.

Thursday 3 April 2014

Sweett and Sour

Sweett crashes 25 per cent


Yesterday, Sweett (CSG) dropped by over 25 per cent (to 36p) following an announcement that the company was launching an investigation into allegations that former employees were involved in "material deception".

As hard as one may try to remain emotionally detached in such situations, its difficult to avoid that sinking feeling. As well as being one of the 15 stocks in the Mechanical Bull (MB) portfolio, I had around £4000 worth of stock in real life, which is now worth less than £3000. This has turned a lackluster month or so into one I would like to forget.

Second Thoughts


Further, as someone who has recently embraced strategic ignorance, one can't help starting to have second thoughts.

But the question is, would due diligence have made any difference? As someone who is no expert in due diligence, I am not really able to make that call, but I decided to have a bit of dig and see what others have been saying.

No Red Flags Spotted


A quick search on Stockopedia, found none other than Paul Scott informing us that he was dumping Sweett as it was now "uninvestable". He argued that they are a small company and could easily get wiped out.

Despite the negative prognosis, I immediately felt much better. If the master of spotting 'red flags' didn't see this coming, then what chance did I have?

Back in December last year, I see Paul Scott did have some major concerns around the presentation of their results. In fact he initially slated the company for what he took to be a lack of  clarity. However, he later moderated his stance following a conversation with a company advisor. He concluded by saying:

Overall I'm reasonably happy with those shares now. The true underlying EPS forecast for this year (ignoring the one-off derivative gain) is 4.8p. Therefore at about 62p the shares look sensibly priced to me, at a PER of just under 13. 

But in any case, the initial concerns raised by Mr Scott had  nothing to do with yesterday's dramatic fall.

Brokers and Boards


Yesterday, Westhouse Securities reiterated their buy rating (target 91p) although I assume they didn't factor in the events that were announced the same day.

Meanwhile, over on the iii boards, the sentiment was generally sanguine and the consensus was that they would bounce back. One person even claimed this was a good buying opportunity. While I don't stake too much on what is said on these boards, there was no one saying "I told you so", which is the most common refrain when things turn sour.

At the close of play today Sweett bounced back by around 8 per cent.

Standing Firm


In conclusion, I reckon that no one saw this going and any due diligence on my behalf wouldn't have made a blind bit of difference. This is just one of these things. Paul Scott may well be right, but the Mechanical Bull will stand firm. The MB numbers will tell me when to sell-up not movements in the share price.

Tuesday 1 April 2014

Mechanical Bull Portfolio - March Review

Summary

The Mechanical Bull (MB) portfolio was down by 1.4 per cent in March compared with a 3.1 per cent drop for the FTSE 100. So not a stellar month by any means. The biggest gain (by far) was Fyffes (FFY) with a 48 per cent rise. Cohort (CHRT) was the worst performing dropping by 18 per cent. Keller (KLR) was dropped from the portfolio (booking a small profit) to be replaced by Lookers (LOOK).


Comparison with Stockopedia's Screen of Screens

While pondering this month's rather lacklustre performance, it crossed my mind to check up on how Stockopedia's "Screen of Screens" (SoS) was faring. After all, the MB is a hybrid between this screen and their Stockranks index. As it turns out, the SoS performed even worse, down by 3.5 per cent in March.

So this got me thinking  about the relative performance of the MB portfolio and the SoS since the beginning of this experiment. It is perhaps surprising that I haven't thought to do this earlier since to the basic challenge I've set myself is to see whether I can improve upon Stockopedia's SoS.

As I have argued before there is a simple and powerful logic to the premise that if there is any predicative power at all with screening, then the SoS should tend out perform others. However, combining this screen with the Stockranks index should provide additional value, by highlighting stocks with even better allround strengths.


Preparing the Analysis

Before I show the results of this comparison, I just want to talk briefly about how put this analysis together. It took me a while to figure out exactly how to do it, but I eventually worked out how to scrape both the Stockopedia website for the SoS data and Google to scrape the equivalent data for the MB portfolio. Stockopedia is mostly very good, but I find the charting functions for custom portfolios don't quite cut it and so I keep a replica of my MB portfolio in Google Finance for these purposes. Anyway, after a bit of fiddling about, here are the results:


Mechanical Bull vs Stockpedia's Screen of Screens (May 2013 to March 2014)



The results seem quite persuasive. The MB portfolio held a narrow lead for the first five months or so but then started to pull ahead towards the end of the year and into 2014. To illustrate this more clearly, I have added another data series, namely the the extent to which the MB has outperformed the SoS.


Everything is relative.

After a rather disappointing month, it is good to be see things in perspective. The MB portfolio has clearly held up rather better over the past few months than the SoS. As I try to keep reminding myself, everything is relative. As long as I can stay ahead of my benchmarks, then the long-term returns should take care of themselves.