Commenting on the bumper returns from my Great Expectations screen a year ago (a 53 per cent total return compared with 17 per cent from the FTSE 350), I suggested that no one should get too carried away with extrapolating the results into the future as it is something of a bull-market screen. The past 12 months have been a lot more mixed for the stock market and the returns generated by the screen seem to bear the view out that the screen works best in bullish market conditions. That said, it has produced a good degree of outperformance over the past 12 months - its just that the journey to get to the end result has been hard going.
At worst the FTSE 350, which is the index from which my Great Expectations shares are selected, was off 2.4 per cent in October, on a total return basis, and at best it was up 8.1 per cent in September. Such fluctuations in the market, which reflect changing sentiment towards a number of previously dominant themes, are not easy conditions for a hard-headed screening strategy to work with. Indeed, while the Great Expectation shares have managed to generate a 16.9 per cent total return by March this year, they subsequently spiralled to a negative 6.7 per cent come October. A large position in house builders and changing sentiment towards the sector had a big bearing on this choppy ride. That said, on a 12-month basis, the Great Expectation screen looks pretty good, boasting an 11.8 per cent total return compared with 6.5 per cent from the market.
The returns from the individual shares selected by the screen were a lot more varied than last year, too, when I was left agog by the fact that only one of the 16 shares actually underperformed the index. This year seven out of the 16 underperformed (see table).
Performance 2013-14
| Name | TIDM | Total Return (17 Dec 2013 - 28 Nov 2014) |
|---|---|---|
| Barratt Developments | BDEV | 43% |
| Ashtead | AHT | 42% |
| Bellway | BLWY | 32% |
| Taylor Wimpey | TW. | 30% |
| Dixons Retail/Dixons Carphone | DXNS/DC. | 28%* |
| Pace | PIC | 25% |
| Howden Joinery | HWDN | 21% |
| International Consolidated Airlines | IAG | 20% |
| Berkeley | BKG | 8.6% |
| Ted Baker | TED | -0.1% |
| Redrow | RDW | -1.2% |
| Brewin Dolphin | BRW | -2.2% |
| Britvic | BVIC | -2.6% |
| Sports Direct | SPD | -6.0% |
| Hargreaves Lansdown | HL. | -23% |
| Thomas Cook | TCG | -26% |
| FTSE 350 | - | 6.5% |
| Average | - | 12% |
*Accounts for August merger with Carphone Warehouse
Source: Thomson Datastream
So 2014 was not a vintage year for this screen, however, this rather more muted performance comes after two stronger years. The cumulative return from tracking the screen since I began to run it in December 2011 is a mighty 121 per cent total return (excluding spreads and dealing costs) compared with 44 per cent form the FTSE 350 (see graph). Using a 1 per cent proxy charge for spreads and dealing costs gives a cumulative total return of 115 per cent.
Great expectations vs FTSE 350
The reason for my assertion that the Great Expectation screen is something of a bull-market screen is that it focuses on price momentum, forecast earnings momentum and upward broker-forecast revision. These things particularly tend to move in unison for cyclical companies with high "operational gearing" (the process whereby a rise in sales is magnified into a far bigger rise in profit due to a company having a high proportion of fixed costs). When the economy, the market and sentiment goes into reverse, though, these are precisely the type of stocks that tend to be hit the hardest.
The full Great Expectations screening criteria are as follows:
■ EPS forecasts for each of the next two financial years upgraded by at least 10 per cent over the preceding 12 months ■ EPS growth of 10 per cent or more forecast for each of the next two financial years ■ Share price momentum at least double that of the market over the last year and better than the market over the past six months, three months and one month |
This year only two companies (Ashtead and Go-Ahead) passed all eight of the screen's tests. As my primary concern is brokers' upward forecast revisions I am not prepared to relax this criteria. I have, however, allowed shares to fail one of the price-momentum tests in order to get a decent number of results. Based on the loosened criteria, 13 stocks passed the screen this year. I've provided write-ups for Ashtead and Go-Ahead below along with three of the stocks showing the strongest three-month momentum that passed seven out of the eight screening tests. The other stocks are listed in the table at the end of the article.
Expecting great things
