The key reason why my annual bargain share portfolios have performed so well over the years is that I have targeted small-caps and micro-cap companies where I can use my stock picking and analytical skills to gain an edge. That’s because there is a paucity of institutional research and media coverage in this space, thus creating market mispricing opportunities and valuation anomalies to exploit.
I also use seasonal investing strategies to super charge returns. That’s relevant right now because the tendency of the UK-listed housebuilding sector to rally in the first quarter is one of my standing dish trades of the year. I first discovered this phenomenon while carrying out quantitative research almost two decades ago ('Time to take stock', 14 November 2003). The trading strategy has stood the test of time: since 1980, the sector has rallied 85 per cent of the time in the first quarter to deliver an average net gain of 11 per cent. Losses during the down years have been manageable.
A rebounding UK economy, tight labour and housing markets, low mortgage rates and generous home buyer government schemes point towards a continuation of this trend. That’s good news for two of my sector small-cap picks.