It's been a tough 12 months to be an investor in small caps and Aim stocks. However, my screening strategy based on selecting high-yielding smaller companies has come through the turmoil rather well. The 14 stocks selected by the screen a year ago have produced a 13.7 per cent total return compared with a meagre 1.8 per cent from the FTSE Small Cap and a woeful -10.6 per cent from the FTSE Aim All Share (see table). The strong outperformance also builds on the screen's success from its first outing in November 2012 when it delivered a stellar 43.1 per cent total return over 12 months, compared with a bumper 38.8 per cent from the Small Cap and 19.2 per cent from Aim.
| Name | TIDM | Total Return (19 Nov 2013 - 14 Nov 2014) |
|---|---|---|
| PowerFlute | POWR | 61.6% |
| Zytronic | ZYT | 54.2% |
| Churchill China | CHH | 52.7% |
| S&U | SUS | 36.4% |
| Portmeirion | PMP | 30.9% |
| Creston | CRE | 29.6% |
| Park Group | PKG | 11.8% |
| Fairpoint | FRP | 4.3% |
| MS International | MSI | 2.8% |
| Matchtech | MTEC | 1.3% |
| Hydro Int. | HYD | 0.9% |
| XP Power | XPP | -4.8% |
| Pan African Resources | PAF | -11.7% |
| Connect | CNCT | -18.8% |
| Average | - | 13.7% |
| FTSE Small Cap | - | 1.8% |
| FTSE Aim All Share | - | -10.6% |
| FTSE Aim/Small Cap 50:50 blend | - | -4.4% |
Source: Thomson Datastream
The cumulative effect of these two strong years is a 62.8 per cent total return, excluding dealing costs and spreads (see graph). Excluding spreads can be a particular flaw when assessing small-cap performance as the gap between the bid and offer price of such shares can be very large. Based on the average spread on this year's portfolio of 0.54 per cent and using a 1 per cent levy to take account of dealing costs, the cumulative total return would have been 57.8 per cent. That compares with 41.4 per cent from the FTSE Small Cap and just 6.6 per cent from the FTSE Aim All Share.
High-yield small caps vs indices
Targeting and locking in quality high yields can be viewed as something of a long-term strategy compared with some of the other more short-term screens I run in this column. From that perspective, it is interesting to note that simply holding the original 2012 portfolio would have produced better returns than switching to the 2013 selection, with a total return over the period of 84.8 per cent or 81.9 per cent if the 1.54 per cent charge for spreads and dealing costs is applied.
Small caps tend to be more vulnerable than large caps to the ebbs and flows of the wider economy and investor sentiment. This screen therefore encompasses a fair degree of risk despite its attempts to pick quality stocks. The risk, though, has been somewhat offset in previous years by the fact that this screen tends to return a fairly large number of results compared with some of the more exacting screens I run. However, to boost the number of results a screen produces, compromises often have to be made, and that is the case with this year’s screen.
Only three stocks from the FTSE All Small and Aim All-Share passed all seven of the screen's criteria this year. These are the stocks that I've provided a write-up of below. A portfolio of three stocks does relatively little to spread risk. I've therefore also included the 22 stocks that passed all but one of my screen’s tests as part of the screen's results. Two stocks that would have qualified on this basis (SpaceandPeople and Fletcher King) were excluded due to their sub-£10m market caps. All shares have had to pass the screen's key high-yield test, though, which requires stocks to boast a dividend yield that is among the top third of all dividend-paying stocks screened.
The full screening criteria is:
■ A dividend yield in the top third of all dividend-paying stocks screened (over 3.3 per cent) ■ Dividend cover of 1.5 times or more ■ 3-year dividend compound average growth rate (CAGR) of 5 per cent or more ■ 3-year EPS CAGR of 5 per cent or more ■ Average forecast growth for the next two financial years of 5 per cent or more ■ Interest cover of 5 times or more ■ Positive free cash flow |
The share write ups and the table that follows are both presented in order of highest-to-lowest dividend yield.
THREE HIGH-YIELD SMALL CAPS
