Mechanical Bull Portfolio - June Review

Down 3.7 over the month

 

There is no disguising it. June was a dire month for the MB portfolio. It was down 3.7 per cent over the month. This compares with a 1.7 drop for the FTSE 100 and a 2.2 per cent decline for the FTSE 250.

Dart Group mainly to blame

 

The biggest loser was Dart Group. It was down by more than a quarter over the month. At one point it was below 180p although it bounced back to 205p by the end of June.

This fall was triggered by a rather downbeat trading update. What was interesting for me was the widely different reactions from different quarters. Comments on Stockopedia were mostly (although not entirely) negative. A number of comments focused on concerns not at all linked to the update, such as the age of their fleet or just general negative sentiment around the airline sector.

Meanwhile, punters on Interactive Investor were more sanguine. The consensus here seemed to be that the size of the drop was unwarranted and that the drop presented a good buying opportunity.

I broke my own investment rules by impulsively stocking up my real life portfolio at 187p. The size of the drop seemed out of all proportion to the seriousness of the news. I reckon a lot of stops got hit, triggering a mini-collapse. I sniffed a buying opportunity and since I had a bit of cash sitting in my SIPP and so I thought, what the hell...

My Take on Dart Group

 

Although I don’t usually follow the stories behind individual stocks too closely, Dart has been an exception. This is possibly because it piqued my interest well before I adopted my current position of strategic ignorance. So here is my take on Dart.

Having old, cheap planes is actually central to Dart’s business strategy. Since their business is very seasonal, they wouldn’t be able to generate a sufficient return on capital from new planes. However, older planes don’t need to be constantly in the air to be profitable and it is easy to schedule maintenance during the off-season. It seems to me a business model that is fundamentally sound and the number of comments about the age of their fleet probably explains why Dart’s value rank is so high.

Lackluster performance across the board

 

Anyway, I digress. Five other stocks dropped by more than 5 per cent (Matchtech, Lookers, Fairpoint, Pace, Harvey Nash). Indeed, only 3 out of 15 stocks actually rose (RM, Cohort and VP). Ouch!

However, I maintain that this is a blip and that the portfolio has just been a little unlucky. I say this because my real life portfolio held up fairly well during June and was down by less than half a per cent. This was mainly because I hold a good chunk of Kentz, which surged almost 30 per cent during June. Slight differences in timing meant that it never made it into the MB portfolio even though the selection criteria were exactly the same. I also hold Trifast for similar reasons, which was up about 10 per cent over the month.

So it seems that luck can have quite an impact on the short term. The MB portfolio probably had a run of good luck last year and is having a run of bad luck now. However, luck is not a significant factor over the long term and a sound investment strategy should always outperform.

Looking in the Rear View Mirror

Learning from mistakes

Investors naturally tend to focus on their current holdings and how they are performing. Decisions about whether to buy, add, hold, or sell are weighed up and decisions reached. As time goes by these decisions are vindicated, or otherwise. Wise investors reflect and learn from their mistakes and refine their strategies to avoid repeating them.

Keeping an eye on previous holdings

While this kind of advice is often heard, not many commentators cast a backward look in their rear view mirror and systematically write about what they have sold and then reflect on whether they made the right call. One welcome exception is this very honest post from Mark Carter.

I think that this general lack of interest in previously held stocks is just part of human nature. Once we no longer have a direct stake in something, it is natural that we should lose interest and redirect our energy into our current holdings and the next crop of potential buys.

However, it seems to me that a retrospective analysis of what we sell is just as important as what we buy. Indeed, for any type of trading strategy, if what we buy does not go on to outperform what we sold to fund our purchase, what was the point in selling?

A retrospective of sold stocks

With this is mind, I have done just such as review of the first year of the Mechanical Bull portfolio. Sixteen stocks were sold and replaced by sixteen others during the year. Stock rotation is a fundamental design principle of the Mechanical Bull approach, but this was slightly higher than I was expecting.

This may have been because in setting up the portfolio initially, the methodology was picking up a couple of stocks with lower scores then what generally occurs once the portfolio enters a more mature phase. There were five stocks in the original portfolio that had scores of 102 (all now sold). Typically, new entrants score 103 or higher so all other things being equal there should be less rotation over the next twelve months.

Some stocks were both bought and sold during the period, so tracking relative performance gets quite messy. So, for simplicity's sake I have compared the performance of the original 15 stocks over the last year with the performance achieved by the MB portfolio. This will provide an indication of whether all this rotation has been worthwhile. The results are shown below:

Table 1: Annual Performance of the ‘Original 15’ Mechanical Bull stocks to 24 May 2014:

 

This shows that the portfolio would have returned 37.1 per cent compared with 42.6 per cent achieved with rotation. Although rotation did deliver slightly better results, this is hardly a ringing endorsement. The MB strategy does take account of spreads and trading costs, but one would hope for a bit more return for all that activity.

A new rotation strategy?

The MB portfolio requires some form of rotation. Stocks are constantly moving in and out of the zone of interest. Therefore there is a balance needed between staying in the zone and a sensible number of trades. I am not convinced that I quite have got it right.

One idea I am toying with is to refocus the rotation strategy towards a ‘buy’ trigger. Currently, I focus on when a stock drops below my MB score of 90. This becomes a sell trigger with the proceeds being rotated into the highest scoring stock not already in the portfolio.

An alternative might be to focus more on when a new stock appears within say the top five of all stocks. This would act as the buy trigger, which would be funded by selling the lowest scoring stock. This could help enforce better quality buys and also be a way of minimizing unnecessary rotation. I may go back through my spreadsheets and do some backtesting of this idea.

In any case, whatever happens I will keep on keeping one eye on my rear view mirror.

First Birthday Celebrations for the Mechanical Bull

 

A First Birthday

On 24 May 2013, the Mechanical Bull portfolio was born. It wasn't called that in the beginning. It was just an idea that I had been thinking about for a while before I decided to put into action. I invested a hypothetical £30K to see where it would lead. It was a couple of months later when I gave it the present moniker.

So where are we a year later? Well according to stock prices on Google Finance, the MB portfolio is £42,779, which is an annual gain of 42.6 per cent. While this may seem impressive, it is important to see performance in perspective.

Comparative Analysis

First, we should look at the broader market. The FTSE 100 has been pretty flat over the past year. The FTSE 250 has done somewhat better overall with a rise of about 9 per cent, although it was up by a lot more earlier in 2014 with a big pull back in the last few months.

It is also useful to compare performance against other investment strategies. Stockopedia's "Screen of screens" gained by 25.6 per cent

The MB portfolio would have come 7th equal out of Stockopedia's 65 guru (long) strategies. However, three of those ahead have two or fewer stocks, and so the MB portfolio would have faired even better if these non-diversified strategies were excluded.

Although the MB portfolio has gone sideways for the past 3 months, it has actually held up quite well compared to other strategies and the broader market. Indeed, the MB strategy outperformed all these comparators on 3 month, 6 month and 1 year timescales as this table shows:

    Table 1: Portfolio performance up to 25 May 2014

 

It's Not All Good News

It all seems pretty positive so far. However, a closer look at the current state of the portfolio reveals some concerns (Table 2)

     Table 2: Mechanical Bull Portfolio - Full History





Three stocks in the original portfolio remain (Dart, Matchtech, and Staffline). All three have seen strong gains with Staffline more than doubling in value. Of those stocks that were sold, only 3 out of 16 have been sold at a loss. Fyffes was the stand out with a 80 per cent gain.

Looking at the new entries shows a rather less satisfactory picture. Indeed, this year's new entries have been pretty dire, with all of them declining in value. This is a concern and gives pause for thought. This shows that the MB portfolio has held up this year mainly due to the robust performance of a small number of long serving, well performing (and thus over-weighted) stocks.

Topsy Turvy Market

As I mentioned in my previous post there appears to be something rather odd going on in the markets in recent months, with no investment style showing any real strength. Stockopedia's analysis of investment styles (e.g. quality, growth, momentum) shows that these have all underperformed the FTSE 100 over the past three months. Value and income styles are the only ones that have managed to keep up (just!). It is extraordinary to see that the second best performing Stockopedia guru strategy over the past three months has been James Montier's Trinity of Risk. This is a short strategy whose performance is going in completely the  wrong direction. It's all very topsy turvy.

It is not very clear what is going on. One theory is that the mid-cap stocks have had such a strong run over the past couple of years that investors are looking for any excuse to sell. Whatever is happening I am fairly certain that sentiment is overriding consideration of fundamentals. In any case, as long as no investment style is doing well, then the MB portfolio is always going to struggle.

Conclusion

Overall, I am satisfied with how the last year has gone. I remain convinced there is something in this approach. There is powerful rationale in investing in stocks with all round strengths and this has been reflected in a very good return over the past year.

However, this experiment is a good reminder that progress is not a straight line and there will be times where a strategy doesn't seem to work. One has to remember that markets always revert at which point the benefits of this strategy should start to kick in again.

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.

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.

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.

When to sell?

Fyffes leaps 40%

Shareholders in Irish fuit company Fyffes will be wearing banana shaped smiles with yesterday's announcement of a merger with Chiquita to create the world's largest banana company. The share price jumped 40% on the news.

Writing about Individual Stocks

As a mechanical investor I don't try to analyse a stock and decide whether or not to invest. No doubt there are people who think this is crazy. Well they can think what ever they like - its my money after all.

For me the main downside is that as a blogger my approach of strategic ignorance makes it difficult to write about individual stocks and what specifically makes them a good pick.

A Screaming Buy

What I can say is that the MB method picked out this stock as a screaming by right at the beginning of this experiment about 8 and a half months ago. The Composite Rank score (an earlier variant of Stockopedia's Stockrank) had a score of 99 while putting in appearances in 7 their screening strategies.

Why makes things so complicated, when such a simple approach seems to deliver the goods? I'm now up 80% in this stock in less than a year. That's good enough for me.

I now know when to buy, but when to sell?

I am convinced more than ever that I have a reliable method for picking stocks that will outperform the market. Where I am less certain is about whether I have quite got it right in terms of when to sell. Fyffes now has a score of 92, which brings close to the point at which initially I would have expected it to be close to selling.

However, a couple of my initial picks (WH Smith & CSR) I have sold only for the stock price to keep moving higher. WH Smith has ben especially perplexing as the MB score dropped and then rebounded, along with the share price. Perhaps I need to lower the sell trigger?

This is something I will revisit as the strategy matures. I will run some simulations to test different sell triggers. I will also track the performance of my sells along with those that replaced them.

Ticker Name Mkt Cap £m # Screens (Long) Composite Rank MB score DTG Dart 273.3 7 99 106 FFY Fyffes 169.5 7 99 106 CSR CSR 915.9 7 99 106 STAF Staffline 101.7 6 98 104 CRE Creston 55.6 6 98 104 SMWH WH Smith 970.1 5 99 104 MTW Mattioli Woods 52.7 4 99 103 KLR Keller 623.1 4 99 103 CPS CPL Resources 129.4 4 99 103 PHTM Photo-Me International 291.4 4 98 102 SPRP Sprue Aegis 35.1 2 100 102 MCRO Micro Focus International 1,043 3 99 102 SVS Savills 765.5 3 99 102 ADN Aberdeen Asset Management 5,692 4 98 102 MTEC Matchtech 78.5 2 99 101