My Great Expectations screen is all about backing winners, and in the four years I have run it on the FTSE 350 the strategy has shown winning form itself. Indeed, the screen now boasts an almost threefold return on a cumulative basis - ie, moving from one year's screen results to the next at the time of publication. The 193 per cent total return from the screen compares with 39 per cent from the index. If a 1 per cent charge is factored in for real world costs such as share spreads and dealing charges the cumulative return drops to 181 per cent.
Great Expectations vs FTSE 350
While the Great Expectations screen should be expected to go through periods of underperformance, since I've been running the screen it has outperformed the market every year.
FOUR YEARS OF GREAT EXPECTATIONS RETURNS
| Year to Dec | Great Expectations | FTSE 350 |
|---|---|---|
| 2012 | 29.9% | 16.3% |
| 2013 | 52.2% | 16.4% |
| 2014 | 11.6% | 5.5% |
| 2015* | 32.7% | -2.6% |
*Covers 13-month period to January 2016
Source: Thomson Datastream
During its most recent year of outperformance (actually 13 months due to my getting behind with screen updates in 2015 caused by a patch of paternity leave) market conditions have been rather choppy. Such conditions could be regarded as an impediment to a strategy that I regard as being best suited to out-and-out bull markets due to the propensity for cyclical, 'operationally geared' companies to fit its criteria (operationally geared companies are those which can turn an increase in turnover into a more significant increase in profit). In the event, though, the screen's 13 share picks actually enjoyed a storming year with not a single one underperforming the FTSE 350 (see table).
| Name | TIDM | Total return (2 Dec 2014 - 6 Jan 2016) |
|---|---|---|
| Bellway | BLWY | 55.4% |
| Taylor Wimpey | TW. | 54.8% |
| Big Yellow | BYG | 46.3% |
| Carnival | CCL | 45.0% |
| Unite | UTG | 45.0% |
| Barratt Developments | BDEV | 37.0% |
| Persimmon | PSN | 34.8% |
| International Consolidated Airlines | IAG | 33.2% |
| Howden Joinery | HWDN | 32.2% |
| Grafton | GFTU | 15.1% |
| Dixons Carphone | DC. | 15.0% |
| Ashtead | AHT | 5.5% |
| Go-Ahead | GOG | 5.3% |
| Average | 32.7% | |
| FTSE 350 | -2.6% |
Source: Thomson Datastream
Part of the reason for the universal outperformance of last year's stock picks can be explained by the fact that the screen did not select any resources stocks. The terrible performance from the resources sector has had a significant impact due to the large weighing given to it in the index performance calculation, which reflects the importance of a number of these companies in market capitalisation terms. Indeed, the median return from the FTSE 350 index over the period was 8.3 per cent; while the median is flattered by so-called "survivorship bias" it does represent a striking difference to the minus 2.5 per cent in the table.
But whichever way you cut it, the screen has clearly been delivering strong returns. The way it has achieved this is by looking for positive changes in broker forecasts over the preceding year. The strategy is based on the fact that there is often a persistent trend in brokers upping their earnings forecasts over time. Importantly, even when a pattern of upgrades is firmly established, as fresh upgrades come through, shares tend to be pushed higher. This fantastic phenomenon is one that I've previously blogged about.
The way the screen attempts to latch onto forecast upgrade trends is by looking for companies that have seen forecasts for their two coming financial years upgraded substantially (10 per cent plus) while at the same time trying to gauge whether sentiment towards the forecast-upgrade story remains strong by looking for persistently strong share price momentum. The full criteria is 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. |
As was the case last time I ran the screen, only two stocks have passed all eight of the tests (four momentum tests, two upgrade tests and two forecast growth tests). So, to beef up the results, I've also adopted the same strategy as I used last time. Along with the two shares that passed all the tests (Betfair and Domino's Pizza) I've included in the table below eight shares that passed the key earnings upgrade tests along with all but one of the other six tests. That said, I've excluded shares if a fall in earnings is forecast in either of the next two financial years.
The two companies passing all the screen's tests are written up below along with the company showing the largest upgrades over the period, JD Sports. It should also be noted that the PEGs in the table below are based on a different data source (S&P Capital IQ) to the earnings forecast data (Thomson Datastream) used for this screen, so there will be some discrepancies.
10 SHARES RIDING EARNINGS-UPGRADE CYCLES
| Name | TIDM | Mkt cap | Price | Fwd NTM PE | DY | PEG | Fwd EPS growth FY+1 | Fwd EPS growth FY+2 | 3-mth mom | Net cash/ debt (-) |
|---|---|---|---|---|---|---|---|---|---|---|
| Betfair | BET | £3.7bn | 3,973p | 39 | 0.9% | 2.89 | 17.5% | 21.2% | 26.9% | £139m |
| Domino's Pizza | DOM | £1.7bn | 1,039p | 31 | 1.7% | 2.16 | 26.2% | 11.6% | 20.1% | £19m |
| Moneysupermarket.com | MONY | £2.0bn | 365p | 25 | 2.2% | 3.26 | 15.8% | 7.8% | 19.9% | £23m |
| Bellway | BWY | £3.4bn | 2,750p | 10 | 2.8% | 0.78 | 22.4% | 9.3% | 16.2% | -£39m |
| Carnival | CCL | £29.1bn | 3,773p | 16 | 2.2% | 1.21 | 24.4% | 15.9% | 14.8% | -$7.4bn |
| Greggs | GRG | £1.3bn | 1,246p | 23 | 1.8% | 2.28 | 24.6% | 6.2% | 12.5% | £41m |
| DCC | DCC | £4.8bn | 5,375p | 20 | 1.6% | 2.17 | 25.6% | 10.7% | 8.6% | -£47m |
| JD Sports Fashion | JD. | £2.0bn | 1,033p | 20 | 0.7% | 1.44 | 33.5% | 8.7% | 7.2% | £100m |
| International Consolidated Airlines | IAG | £12.0bn | 591p | 8 | 1.2% | 0.28 | 78.3% | 36.5% | 4.8% | - |
| Marshalls | MSLH | £652m | 332p | 23 | 1.8% | 0.98 | 31.6% | 24.2% | -6.3% | -£35m |
Source: S&P Capital IQ & Thomson Datastream
