A small UK growth/value/safety specimen portfolio

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I had been running a Greenblatt-esque for a number of years on Stockopedia, which exceeded my expectations, and certainly beat the index.

I had some old notes in which I ran a little screen. In Sep 2022, the 3-stock portfolio returned +28.5%, as opposed to the ASX (All-Share Index) of -2.3%. I repeated the experiment in Aug 2023, and managed to compute the results. The portfolio returned 22.0%, cf the ASX of +12.7%.

The screening criteria I used last time was straightforward enough:
1. DPS CAGR5 > 6% (a growth measure)
2. P/E TTM < 15 ( a value measure)
3. Net cash ( a safety measure)
4. Select some shares from different sectors

Shares were selected "judiciously", by which I mean no in-depth analysis was performed, it was mostly a mechanical screen in which I exercised a little judgement if I had a little knowledge on the company.

It is only loosely a Joel Greenblatt strategy, keeping in the spirit of good, cheap, and growing.

Spurred on by the phenomenal success of the strategy that I experienced on a Stockopedia Fantasy Fund, and the results of the last two experiments, I thought I'd try my hand again.

The original screening criteria above gave plenty of candidates, but I think the requirement for net cash is too strict. So I have adjusted my screen to require an interest Cover > 5. So the criteria are now:

1. DPS CAGR5 > 6% (a growth measure)
2. P/E TTM < 15 ( a value measure)
3. IC > 5 ( a safety measure)
4. Select some shares from different sectors

Here are the shares I chose today, along with their share prices:

MGNS 2960p Industrials
DRX 661p Utilities
RFX 209p Financials
HIK 2060p Healthcare
PETS 297p Consumer Cyclicals
MACF 121p Basic Materials

ASX 4564 Index

Anyway, wish me luck. We'll see how I do in a year's time. This may be my last Greenblatt experiment, as I have made other portfolio choices elsewhere, and I don't want to keep throwing portfolios out there.

I do think that requiring separate sectors is a little too restrictive as there are many diverse companies out there in the same sector with different dynamics. However, I've kept to the diversification rule on this occasion, and we'll see how we go.

p103

 

[Riddler]

So how do you divide up the capital, is it just equal parts? And do you just buy all of the stocks immediately once you've screened and settled on the ones you want to buy with no regard for where and how they are currently trading?

Also I see your previous results are based on a single calendar month each time, is this the limit for which you can hold the assets? The results posted are impressive but I can't help think it's all just been by good chance so far because I can't see where the edge is here, keep blanket buying the screened out stocks and someday they'll be at ATHs and 30 days on from then they'll be down, that's inevitable right? Unless, I'm missing something, I mean once you buy how do you exit?

 

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Equal parts. I only personally have positions in MGNS and MACF, so the rest are theoretical trades. I use the price of the last trade at the time I performed the screening, which includes that of the ASX. Admittedly there will be slippage to the portfolio, like spread, transaction and stamp duty. The companies are fairly large, so the spread is small. MGNS, for example, has a spread of only 17bps. Transaction fees would be small. The stamp duty is unavoidable, of course.

By trading, I'm not sure if you are referring to fundamental or technical. For this particular screen that I ran, I did actually rank the companies in descending StockRank according to Stockopedia. But I wasn't religious about this. It was just a "nice to have" feature. Higher stock ranks do statistically produce higher returns. The screen isn't based on technicals. Perhaps incidentally. MGNS, for example, has a Momentum rank of 94 (high is good). It is a blend of price momentum and earnings momentum. I don't want to over-emphasise this, though. It is just a small tilt in my favour.

The screen uses fundamentals in the sense that, well, interest cover, valuation, and dividend growth are fundamental measures.

My previous results were not based on a single calendar month. The portfolios lasted a year each time. The results could be due entirely to chance, of course. All mechanically constructed portfolios are. There's no "edge" here, it's a mechanical portfolio. The portfolios were constructed ahead of time, with only one portfolio being active at a time. There's been no selection bias in the sense that I ran half a dozen portfolios and discarded the five worst ones. There's been no weeding out of results or requirement to exercise hindsight bias. They've just been companies that have performed well.

It is largely a mechanical screen, although like I said, I did use a bit of "judiciousness" on some selections. For example, HIK produces generic pharma. It's reasonably safe from huge cyclical swings, for example. It's at a reasonable valuation. MACF, well, I own shares in them. They have good returns on capital and they make careful acquisitions. They have been growing steadily. They're in the packaging business, which sounds terrible, but they do stuff like packaging design so it tends to be more bespoke for the customer, which gives them a little competitive advantage. And so on and so forth.

So I might have some hazy background knowledge in some of the companies sometimes which might bias my selection. Again, I don't want to overstress this though, as it is largely a mechanical portfolio.

UPDATE 1 : I see, Riddler, that you are a trader. The specimen portfolio I constructed is not designed for trading, so maybe we're talking at cross-purposes a little. It's a buy and hold for one year portfolio.

 

[Riddler]

In Sep 2022, the 3-stock portfolio returned +28.5%, as opposed to the ASX (All-Share Index) of -2.3%.

So this sentence means that between Sep 2021 and Sep 2022 the portfolio returned almost 30% does it?

By trading, I'm not sure if you are referring to fundamental or technical

Technical but now I understand you do not have much or any regard for this though I couldn't comprehend that initially as I thought you only held positions for a calendar month, now I know you hold for at least a year I understand a bit better though I still wouldn't just dive in anywhere personally, even when I am position trading I will delay entry if the price action isn't favourable when I am ready to deploy capital

Do you run these experiments for any real purpose, I mean, do you intend to start trading these ideas with your own money at some point if you continue to see positive results? Or is it just recreational? And why do you choose the ASX?

 

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So this sentence means that between Sep 2021 and Sep 2022 the portfolio returned almost 30% does it?

Yes. Excluding transaction costs and dividends.

Do you run these experiments for any real purpose,

Interest mostly.

There used to be a site that did Fantasy Funds. I ran my own one for a number of years. It was based on their Greenblatt Screen. It was an exercise in seeing if I could pick a subset of the Greenblatt candidates that did better than the Greenblatt screen itself, and the market in general. I can't quote results because they removed the funds and I hadn't kept records. It consisted of 12 shares with one rotated a month. I am confident that it beat both, though. Part of the trick was weeding out some of the garbage that the Greenblatt screens threw up. Dodgy-looking Chinese companies, and so-on.

The separate results I have highlighted before were not part of the Fantasy Fund.

I mean, do you intend to start trading these ideas with your own money at some point if you continue to see positive results? Or is it just recreational?

It's just recreational. The tricky problem is that just because it was beaten the market two years in a row, doesn't mean it will in future.

But I'd figure I'd post a specimen portfolio and see how I get on.

I'm somewhat transitioning to a QARP/GARP approach, which requires very little activity on my part. There are some value plays in my portfolio, too.

I might start a trading journal on here with real trades. But there's nothing to report yet, and I don't expect to report any activity in the near future. It's much more long-term oriented. Something I've been pondering lately is to let dividends accumulate in my ISA. If the market drops 10% then use the accumulated dividends to buy what I think is the most attractive share in my portfolio. Come new ISA season, I'd use the fresh injection of money to buy a new share, or top up. Something like that, anyway.

So the sort of things I'd look for are good returns on capital, moderate growth, reasonably stable margins (so I'm not buying cyclicals at the top), and moderate valuation. So, say, a PE less than 19 or price to free cashflow of less than 20.

The screen I've outlined above looks to be a pretty reasonable starting point, although I haven't used it when buying something. Like, I don't own PETS, for example, but its revenues have been growing at 9% pa. Its returns on capital are a bit weaker than I'd ideally want, but it seems nicely positioned in the pet care business. Its debt levels are perfectly fine. Analysts have been downgrading their forecasts and there are concerns that they're gouging customers. But, the PE is 13, and the P/FCF is 8.6, EV/EBITDA is 7.7. I'd consider that as good value, and a pretty good quality business.

And why do you choose the ASX?

It seems the fairest. My screen is a multi-cap one, although I'd prefer to stay clear of the real tiddlers. The ASX will naturally tilt towards the FT100 rather than the FT250, but, well, you've got to benchmark against something. The FT100 has beaten the FT250 over the last 5 years, although I'd expect the FT250 to beat the FT100 over longer timeframes. So one could argue as to which benchmark is the "fairest", but I'm going with the ASX.

 

[Riddler]

Oh I see, I thought you were Australian or lived there or something but if you have an ISA I know you must be in 1 of just 2 locations and now I actually researched the tickers in your initial post and can see they're UK stocks, I hadn't heard of any of those before so I thought they were Australian stocks (though I hadn't paid attention to the fact you quoted the prices in pence and not dollars earlier).

UPDATE 1 : I see, Riddler, that you are a trader. The specimen portfolio I constructed is not designed for trading, so maybe we're talking at cross-purposes a little. It's a buy and hold for one year portfolio.

Yes but I invest also my current longest holdings are since 2017. Each 1-2 years I run my own screen and shortlist the best 1-3 ideas for the future. 2-3 years ago CAMT (US) qualified so I bought at an avg of $24, today it's at $94 and was over $100 not too long ago but QLYS also qualified I think that same year but I still haven't bought any as price was over-extended, in fact only recently has it come down to a level where I may need to take a second look. One of my 2 screens is constructed based on O'Neill's criteria and the other is also partly influenced by someone but I have more of my own ideas built into that one too.

Anyway I thoroughly enjoyed reading about your experiment (not bad for a debut post on a forum) so if you do a journal I'll be sure to have a read and follow your progress.

 

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Oh I see, I thought you were Australian

Struth

or lived there or something but if you have an ISA I know you must be in 1 of just 2 locations and now I actually researched the tickers in your initial post and can see they're UK stocks,

Yeah, UK. (It's in the title, BTW).

One of my 2 screens is constructed based on O'Neill's criteria and the other is also partly influenced by someone but I have more of my own ideas built into that one too.

In UK there's a CANSLIM screen over of Stockopedia. That is one of their best-performing screens. I read O'Neill's book a long time ago. It is, perhaps, difficult to put into a screen as he likes cup-and-handle formations, which you can't really set down as screening criteria.

Anyway I thoroughly enjoyed reading about your experiment (not bad for a debut post on a forum) so if you do a journal I'll be sure to have a read and follow your progress.

Thank you! It means a lot. I have drastically reduced my trading in the last couple of years. So I probably won't be posting that much, and not for the foreseeable future. I don't have any spare money at the moment, anyway. My write-ups tend to be fairly brief, anyway. For QARP-like shares, I'm looking for good quality and reasonable size. Very small companies have a tendency to explode on you.

I also don't oversweat the analysis. In addition to sensible measures like returns on capital and valuation, I think that one should get some kind of "feel" for a company and if it's any good. Like, another company that I think is really good is IMI (I don't own), which makes "fluid and motion control applications". An example of one of its applications is in turning oil pumps (in the field, not your house) on and off. It used to be done manually. They need a police escort when they transport some of their stuff, so obviously it's not something that any company can do. On the other end of the scale, that make some parts for artificial heart valves. That's not something any random geezer can cobble together, of course. It is on a PE of 14, and has returns on capital of 17.6%. It didn't make my screen because the dividends had actually reduced over 5 years. Revenue growth was also a little weak. I recall that they've got a new CEO in who has more ambitious plans to grow the business. Any investment can be a dud, of course, and IMI isn't the most exciting company in the world. But I sit there thinking "you know, this is a good company". It kind-of slips under most people's radars. It's not an obvious value share, not a recovery play, not a fast grower, has no AI, or any of that. But, my strategy is, if I can find a good solid company with good growth prospects at a reasonable price and hold for a number of years, I should do well.

A lot of bloggers, and sites like Seeking Alpha, indulge in what I might call "analysis pr0n". It's all very detailed and all, but I often end up thinking "so what"? A lot of it is too speculative, too short-term, or fairly useless anyway.

Like, I saw one YT video about "Should I buy Arm?" They then went banging on about Du Pont ratio this, and Du Pont ratio that. My eyes glazed over. So I wrote back "Yes, but is it a buy or a sell?" Which is presumably the only thing that really matters. They replied that their aim was to provide investors with information. I didn't say anything, I just left them thinking what a waste of time it all was. Not everyone is like that. There are some Youtubers out there who explained what they actually bought, or actually sold, along with a synopsis as to why. Excellent! These are the Youtubers worth following, assuming you think they have a functioning brain. Lynch was probably right. If you can't explain an idea in 90 seconds, it's probably too complicated.

 

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MACF reports H1 today. "Performance broadly in line with market views". Against comps (H1 '23) revenues down 8%, operating profit down 2%, profit down 4%. They have increased their dividends by 2% though.

Early trading saw its price down 1.7% to 118p.

Fundamentals: PE 9.4, P/FCF 6.1, EV/EBITDA 6.4. IC (interest cover) 9.6. On valuation metrics, it's cheap.

I hold, although it's been a disappointment for me. I maintain a positive view.

 

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DRX issues an RNS today, "Ofgem closed investigation into Drax's biomass profiling data, confirming no evidence found that its biomass isn't sustainable"

Price rose in early trading (as you'd expect), but has fallen as at 11am. Price stands at 653p, down from its entry price in the portfolio pf 661p.