Taking profits after a winning streak

Dog shares savage the market

That's because I have reached that point in time when the 'alpha' my Dog shares of the S&P 500 generate above the return on the index has a habit of petering out and the portfolio is more a play on the market itself, but one that carries far greater risk for all the reasons I mentioned in my original analysis. I am not complaining because the 10 shares I advised buying have put in a rocket-fuelled performance and, as of close of trading on Friday 25 January, they are up by 17.8 per cent in only 17 weeks, excluding dividends earned on five companies. To put that performance into perspective the S&P 500 has only risen by 4.4 per cent in the same period. Or to put it another way, do this three times a year and you are generating eye-watering annualised returns of 63 per cent on your capital. So, in the circumstances, I am not going to be greedy or run my luck on the portfolio any longer and have decided to bank these huge gains.

How Simon Thompson's US Dog Share Portfolio has fared

True, if you bought all 10 shares outright rather than taking out a spread bet on the companies you have been exposed to currency movements, but on this score there is more good news since the sterling/dollar exchange rate has moved in our favour from around £1=$1.623 when we opened our positions to £1=$1.574 now. That 3.0 per cent currency gain should help offset some of the dealing charges if your broker decided offered you a less than favourable exchange rate when you made the purchase.

Options for profit

I am also booking quick-fire profits on the traded options play I opened on the FTSE 100 at the start of this month when the index was at 6043 ('Highly profitable options', 3 January 2013). To recap, I had previously shown how you could make bumper profits from traded options by employing a 'buy-call spread trading strategy'. This involves two trades. The first is buying an 'in-the-money' call option with the highest strike price possible, but with virtually all the option price as intrinsic, rather than time value. I then simultaneously sell a call option with the same expiry date but with a higher strike price.

This trading strategy delivered a bumper 38 per cent profit between the end of October and 21 December last year ('A smarter Option', 25 October 2012) during an eight-week period when the FTSE 100 rose by 1.3 per cent from 5832 to 5909. Moreover, the same strategy, but using the February FTSE 100 call options with expiry in mid-February, has come up trumps again.

That's because earlier this month, when the FTSE 100 was trading at 6033, I advised buying call options on the index with a 5800 exercise price and 15 February 2013 expiry date for only 255p, or the equivalent of 255 index points. In other words, 233p of the option price was 'in-the-money' and only 22p, or the equivalent to 22 points on the FTSE 100, was time value which would erode between purchase of the options and expiry on Friday 15 February. By contrast, the FTSE 100 call options with a 6050 exercise price were priced at 79p, or the equivalent of 79 index points, all of which was time value since their exercise price of 6050 was above the level (6033) of the FTSE 100 at the time.

So my trading strategy was simple: buy the FTSE 100 February 5800 call options for 255p and at the same time write the 6050 call options to pocket the 79p option premium. This significantly lowered my net investment to 176p - the difference between the two option premiums - and provided a safety net on this short-term trade as I was in effect long of the FTSE 100 at 5976, or 57 points below the index at the time of entering this trade. Not that the position was ever in danger of going under water because markets have rallied strongly and by Thursday 24 January the FTSE 100 had risen by 4.1 per cent from my entry point of 6033 to 6283 (at 9.30am on 28 January).

This has done wonders for my traded options as the 5800 series calls have shot up in value by over 85 per cent from the 255p I paid for them to 465p (the price to sell in the market). And even though the 6050 series calls have risen sharply, too, from 79p to 228p (the cost of buying them back), the 210p profit on the former options more than offsets the 149p loss on the latter to give me a 61p net gain on my original net investment of 176p. That works out at a 35 per cent return on the capital employed on this trade in only 17 trading days which is good enough for me. So, with profits rapidly approaching the maximum return we could ever make on this trade it's time to bank those bumper gains.

Bargain shares portfolio update

My 2012 Bargain Shares portfolio is currently up 31.4 per cent on an offer-to-bid basis since Friday 10 February 2012, which marginally lags behind the total return of 32.4 per cent on the Fidelity UK Smaller Caps Fund in the same period, but it's worth noting that return is calculated on a bid-to-bid basis. Fidelity UK Smaller Caps is the best-performing small-cap fund out of the 56 funds in this segment in the past year, according to Trustnet.

However, the time has come to decide whether the upside potential on each of the portfolio's 10 constituents is substantial enough to justify still holding them or whether the capital could be better redeployed into my 2013 Bargain Shares portfolio which will be published both online and in the magazine on Friday 8 February. So, having run the rule over all of my Bargain Share holdings, I have decided to sell four of them.

How Simon Thompson's 2012 Bargain Shares Portfolio has performed

The bumper gains made have been driven by two of my picks in the property sector: East London housebuilder Telford Homes (TEF: 202p) and housebuilder and strategic land specialist MJ Gleeson (GLE: 187p). Shares in the companies have rocketed since I recommended buying last February as has the whole of the sector. I am still positive on the housebuilders, which is why I advised buying the eight FTSE 350 companies at the start of the year, a trade that is working out well with the average gain over 6 per cent on these holdings. However, shares in Telford are now priced on a 33 per cent premium to Shore Capital's March 2014 net asset value estimate of 152p and are rated on 11 times earnings estimates for that financial year, too. Those forward ratings represent a significant premium to the homebuilder sector averages and it's time to bank those gains on Telford.

I have also been thinking long and hard about MJ Gleeson, having maintained a buy recommendation on the shares when they were trading on a spread of 176p-180p after the company issued a trading update earlier this month ('Small-cap wonders', 11 January 2013). They subsequently hit a high of 191p on Thursday, 24 January to bring the valuation bang in line with the company's net asset value. True, the majority of the UK-listed housebuilders are rated on premiums to book value and Gleeson is undoubtedly well placed as these players compete to buy land off the company to support their own development pipelines. However, the valuation anomaly I identified a year ago has now been corrected and with market makers offering me 186p a share in the market, I am booking profits here, too.

It's time to call time on Mallett (MAE: 67p), one of the UK's oldest dealers in high-quality antique furniture and works of art. A year ago the company looked well on the way back to trading profitably following the move from its London showroom in New Bond Street to an 18th century Grade I listed townhouse in Mayfair's Dover Street. The building not only provides more accommodation for the company's works of art, primarily 18th century and Regency period furniture, clocks and pictures, but slashed the annual rent bill from £1.2m to £550,000.

True, the shares are priced well below book value of 111p, a valuation that certainly looks attractive to activist investor Peter Gyllenhammar, who controls 25.5 per cent of the share capital. However, Mr Gyllenhammar has yet to make a move and Mallett has reported that after an encouraging first half trading conditions have been far more challenging, particularly in New York where Superstorm Sandy affected the company's New York showroom. As a result, analysts at N+1 Singer expect Mallett to post a loss of £0.4m for 2012 and, merger & acquisition (M&A) possibilities aside, there no longer appears a catalyst for a re-rating. I am taking a small loss on this holding.

The investment in Rugby Estates (RES: 330p), a small-cap property company in the process of winding itself down, has not gone as planned. That's because a tough secondary market in commercial property is making it difficult to realise the value of the company's assets close to book value, a fact I underestimated when I advised buying in February. Latest guidance is that investors will receive a further return of capital of between 370p and 470p a share, with a return nearer the bottom of that range likely. In the circumstances, I have decided to sell up at 330p a share to crystallise a loss of 9.6 per cent after factoring in the 250p a share of cash returned in June (through an issue of 'B' and 'C' shares) and a three-for-seven share consolidation. The funds will be redeployed in my 2013 Bargain Shares portfolio where the potential for gains is far greater.

Regarding the other six holdings in the portfolio, I am happy holding shares in investment company Eurovestech (EVT) and retain buy recommendations on the following five holdings: publisher Bloomsbury Publishing (BMY); stamp and collectables retailer Stanley Gibbons (SGI); specialist engineer Molins (MLIN); investment company Trading Emissions (TRE) and Indigovision (IND), a pioneer in internet protocol network-based security surveillance systems. I will update the investment case on all six companies on Friday 8 February.

■ Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written no fewer than 15 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:

Market timing (Lessons to learn, 24 January 2013)

Communisis, Netcall (Bumper trading gains, 23 January 2013)

Crystal Amber, API, Sutton Harbour (More upside to come, 22 January 2013)

PV Crystalox Solar (Seeing the light, 21 January 2013)

Bloomsbury Publishing (A publisher for the digital age, 18 January 2013)

Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 (Stockpicking Marvels, 16 January 2013)

Eros (A share firmly in the picture, 15 January 2013)

Netcall (Jumping the gun: take two, 15 January 2013)

Moss Bros, Communisis (Jumping the gun, 14 January 2013)

Stanley Gibbons, MJ Gleeson, Spark Ventures (Small cap wonders, 11 January 2013)

IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)

S&P 500 portfolio of dog shares (Dog shares barking back, 8 January 2013)

Air Partner (A share ready to take off, 7 January 2012)

FTSE 100 traded options strategy (Highly profitable options, 3 January 2012)

Telford Homes, MJ Gleeson, Molins, Noble Investments (Rampant bargain shares, 31 December 2012)