Following two years of strong outperformance since 2011, last year I commented that for the first time since I started running my Best of British stock screen the theme actually seemed to be in vogue. Naturally that has heralded the first year of underperformance by the screen. The results have not been a disaster, though, with the top five stocks delivering a 4.3 per cent total return (share price movements and dividends) while the full 12-stock portfolio returned 3.7 per cent. That compares with a 6 per cent total return from the FTSE 350 (see table).
| Name | TIDM | Total return (2 Oct 2013 - 30 Sep 2014) |
|---|---|---|
| Sports Direct Intl. | SPD | -12.9% |
| ITV | ITV | 21.1% |
| Howden Joinery | HWDN | 16.8% |
| Legal & General | LGEN | 21.3% |
| N Brown | BRWN | -24.7% |
| Rightmove | RMV | -8.2% |
| Hargreaves Lansdown | HL. | -1.5% |
| Interserve | IRV | 8.1% |
| Booker | BOK | -3.8% |
| Restaurant Group | RTN | 24.5% |
| Next | NXT | 33.4% |
| J Sainsbury | SBRY | -32.3% |
| FTSE 350 | FTSE350 | 6.0% |
| Average | - | 3.7% |
| Top 5 | - | 4.3% |
I originally started the screen as a contrarian bet against the extremity of some of the negative commentary about the UK economy, such as rather off-the-wall comparisons with the troubled economy of Greece. So perhaps it is fitting that with the UK apparently in full-on recovery mode the screen has now underperformed.
However, the mood towards the UK's prospects now seems more measured than the high optimism that existed at this point last year. Indeed, there is arguably more focus now on reasons for caution, such as the utter failure of the current government's plan to eliminate the deficit by 2015. What's more, the recovery, while good compared with some other rich nations, clearly looks frail by historic standards - and with consumers still deep in hock and capital expenditure weak, there are some worries about the sustainability of recent growth.
Despite the recent dud year, the performance of the Best of British screen since I came up with it in October 2011 has been impressive on a cumulative basis (ignoring dealing costs and spreads). Indeed, the cumulative total return from the screen now stands at 80.5 per cent for the top five stocks from each year and 63.5 per cent for the entire portfolio. That compares with 40.1 per cent from the FTSE 350 over the same period.
This year, the Best of British screen has been rather less prolific in its stock picks than in previous years, turning in just nine positive results. Maybe this in itself offers some insight into the market's mood and the state of UK-focused companies. Principally, the Best of British screen is a momentum screen, looking for FTSE 350 companies that generate more than three-quarters of sales in the UK and have experienced better-than-average share-price movements over the past three months. So if it is perceived that prospects for UK-focused companies are deteriorating, then fewer results should be expected from the screen. There are also several quality tests, which mean that if the trading of UK-focused companies is actually deteriorating, there are also likely to be fewer results.
The full list of screen criteria is: ■ At least three-quarters of revenue from UK. ■ Three-month share price momentum better than FTSE 350 (currently 8.3 per cent). ■ Return on equity of more than 10 per cent. ■ One-year beta of less than 1. ■ Forecast EPS growth in this and the next financial year. ■ Better-than-average five-year compound annual growth rate (shorter periods used where a full five year record is unavailable). ■ Net debt of less than 2.5 times cash profits. |
There is a preponderance of consumer-focused stocks in this year's screen and such a concentration of a certain type of stock makes the portfolio as a whole higher risk. The write-ups below focus on the top five results from the screen based on three-month momentum while the remaining four stocks are listed in the table that follows.
THE BEST OF BRITISH
