Halfords rides high with re-selection - Nifty Thrifty Sept 15 update

Halfords rides high with re-selection - Nifty Thrifty Sept 15 update

The bad news in this, the 21st quarterly review of the Nifty Thrifty portfolio, is that summer turmoil in the stock market has hit performance. The good news is that the portfolio, which slavishly follows the recommendations of a computer, has done less badly than the stock market in general.

Over one year, the Nifty Thrifty portfolio has increased 6 per cent in value, while its benchmark has declined in value by 4 per cent.

An investment of £30,000 in the Nifty Thrifty just over five years ago would be worth £48,926 today, a gain of 63 per cent.

To view the Nifty Thrifty's holdings and trading chronology, click here.

SELECTIVE

£30,000 invested over the same period in the accumulation units of a FTSE 350 index-tracking fund would be worth £42,857, a gain of 43 per cent. Both the Nifty Thrifty and the tracker fund select shares from the same index, the biggest 350 companies listed on the main market in London, but the Nifty Thrifty's algorithm is more selective.

It only invests in 30 of the 350 companies, selecting those non-financial companies that are financially strongest according to the F_Score - a nine-criteria rating designed by accounting professor Joseph Piotroski - and that have the highest combined profitability and valuation rankings according to a system devised by value investor Joel Greenblatt.

The F_Score was designed to weed out the companies most likely to fail by identifying those that are becoming less profitable, less efficient and more dependent on outside sources of finance (either by using more bank debt or by issuing more shares).

Greenblatt called his system the Magic Formula - the idea being to select good companies, those that are highly profitable, at cheap prices. The measure of profitability is return on capital. The measure of value is the earnings yield.

These statistics are not foolproof but they improve the odds of picking good companies at cheap prices, which is why the system only works reliably on large baskets of stocks over long periods of time.

When I started the portfolio, I staggered the share-buying as equally as possible over the four quarters of the first year, adding eight shares in June 2010, eight more the following September and then seven shares in December and seven more in March 2011.

Each share is replaced after one year unless it requalifies for the portfolio because it is still in the FTSE 350 index, it still has an F_Score of five or more out of nine, and it is still one of the most highly ranked candidates according to Greenblatt's Magic Formula.

This time, only one of the eight shares selected one year ago has been reselected by the algorithm. It's Halfords, the nationwide chain of motor, bike and camping stores and auto repair centres.

EJECTIONS

The algorithm has given seven shares the heave-ho (see the Nifty Thrifty ejections table, click to enlarge). Antofagasta, the Chilean copper miner, has lost 27 per cent of the portfolio's investment after accounting for dividends, stamp duty and trading costs.

UBM has also lost the portfolio money. It organises trade shows and operates PR Newswire, which distributes press releases to journalists.

Otherwise, the algorithm has been busy offloading star performers. Having selected Micro Focus International in four successive years, it's finally passed on the software house which earned the portfolio a 345 per cent profit, including £478 in dividends.

In some ways more impressive, because it was only selected a year ago, is the 185 per cent profit from an investment in Betfair. The sum of £1,375 invested in the online sports betting company a year ago has returned a clear profit of £2,547.

Scientific, technical and legal publisher RELX, known until earlier this year as Reed Elsevier, has earned the portfolio an 85 per cent profit in its two-year sojourn, and industrial printhead manufacturer Xaar has turned initial steep losses into a 22 per cent profit for the portfolio over one year.

Domino Printing Sciences is leaving the portfolio, probably never to return. The industrial printer manufacturer has been bought by US giant Brother, giving the portfolio a short but sweet 56 per cent profit.

ADDITIONS

Dividends paid in the past six months and the proceeds from the seven ejections leaves about £2,370 to invest in each of the seven new additions (see the screen table to the left, click to enlarge).

They are IT reseller Computacenter, housebuilder and land regenerator St Modwen, broadcaster and TV production company ITV, advertising agency WPP, and two manufacturers, Rotork and Renishaw.

Rotork makes actuators (motors) and other equipment for controlling fluids in oil and gas pipelines and many other applications. Renishaw specialises in probes, sensors, gauges and fixtures to calibrate, test, control and automate the performance of machine tools.

In addition to the normal roster of new additions and ejections, one other company sits uneasily in the portfolio. Afren, an oil exploration company with interests in Nigeria, went into administration in August, undone by low oil prices, mismanagement and, reportedly, venality.

The shares are currently included in the portfolio at their value immediately before they delisted. They are almost certainly worthless though, and I shall probably write them off when I update the portfolio in December.


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Comments

Nifty loss prevention

Hi Richard

Having read you activity with this system for sometime..... it appears that it is short of a loss prevention (capital preservation) system.
There have been some heavy losers over time which if avoided would significantly enhance performance.
Would not a simple stop loss system be better than nothing?

Stop gain

Hi Mark, thanks for your comment.

It's very difficult to know whether stop-losses improve performance. The name, of course, implies they do but when you're seeking to buy good companies at cheap prices there is simply no guarantee that the price won't get worse before it gets better. Therefore by selling if the price drops, you could be stopping future gains.

In a sense, stop-losses run counter to the whole ethos of the Nifty Thrifty. Think about it this way, if the price of a share drops, but other things remain equal then the share would be more attractive to the algorithm. You could sell it, only to buy it back at the next opportunity!

While it is far from faultless, the F_Score, one of the statistics used in the algorithm, should reduce the odds of picking losers. It's a combination of nine financial statistics, some of which identify strong companies (based on levels of profitability and debt for example) and some of which identify whether these strengths have improved or weakened over the most recent financial period.

Companies in the portfolio must score five out of nine or more to be included. The theory is its better not to include likely losers in the first place. In multiple tests the F_Score has been pretty effective at weeding out losers. Examples like Afren, and Yell, which went bust while in the portfolio, are the exceptions that prove the rule...

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