Back in 2006 and 2007, I wrote in Investors Chronicle about a mechanical method for selecting and managing share portfolios that I had developed over many years (see and ). This was based on what has more recently been termed 'Growth at a Reasonable Price' or Garp for short. These methods became known as Star, the acronym for a monthly Share Tracking and Ranking system. For many years Star has proved to be a profitable way to selecting shares based on picking those shares that combined a relatively low valuation for the underlying business with an above-average expected growth in earnings per share (EPS) in the future.
After many years of significant outperformance against the All-Share benchmark index, the results from the basic portfolio selection of 10 shares using the Star method were disappointing in 2007 and 2008. I believe that this was largely because the leading equity analysts, from whom the earnings estimates are sourced, proved to be way behind events in predicting the impact the financial downturn would have on the equity market. By way of example, the consensus estimates were particularly weak in the financial sector and were still pointing to substantial positive earnings growth from most of the leading banking groups well after the full horrors of the sub-prime financial collapse became apparent and the share prices of the leading UK banking groups had collapsed.
However, the usefulness of the Star method does appear to be returning again as a mild, albeit shaky, confidence seems to be resurfacing this spring. By early May the standard 10 share growth selections were recording average price gains of 15 per cent against a marginal decline for the wider equity market. During the past few weeks markets have started to demonstrate more strength as investors now begin to fear being left in cash as shares rise. This resurgence of confidence is happening at the same time as unemployment rises on both sides of the Atlantic and as corporate giants such as GM are effectively made bankrupt.
Given that there is more uncertainty regarding both the type and pace of economic recovery than has been the case with previous recessions, I believed it was necessary to add some extra filters to the existing Star screens of growth and value in order to pick a selection of shares that will prove profitable in the future. The latest list features companies that appear to be weathering the downturn and have products or services for which there is likely to be a growing demand in the future. Where possible, I favour businesses that generate a substantial portion of their sales overseas as I suspect that the UK economy will take longer to recover than most. Additionally, the overall level of debt should, as far as possible, be controllable by the company rather than its bankers and there should also be a planned product or service development or other news item that will act as a possible driver for the share price in the future.
