Hotel Chocolat's bitter taste: A review of our 2023 Investment Ideas

Even after accounting for this mishap, our ideas remained ahead of their benchmarks this year in sum. Still, it's worth noting that the Aim-traded chocolatier was the subject of one of this year’s eight ‘sells’, among the 98 investment ideas we have penned in these pages since 12 January. It was published in early July, with the shares near a low of 119p, and as we and many others had concluded – not unreasonably – a growth story that appeared to be melting away.

But one truism in markets is that someone will always see value where you don’t. In the case of Hotel Chocolat, that someone was a multinational strategic buyer for whom £534mn is little more than a rounding error, and 375p a share could yet herald a sweet return. Still, such was the reverse on our call that we managed an ideas section first: a 213 per cent loss in both absolute and relative terms.

Last year, our well-timed and well-targeted sell ideas were a source of alpha. Amid a rampant bear market, the average theoretical sterling-based return from 2022’s 12 sell calls during the year was 13.6 per cent. That translated to an outperformance of 15 per cent against benchmarks and nudged the year’s relative overall performance into the black.

Despite that success, I highlighted the need for caution with our sells in last year’s review – given the possibility of sudden improvements in risk sentiment.

As a general rule, we do not advocate short selling to avoid precisely this sort of situation. Although identifying overvalued or overly risky stocks is an important skill for any active investor, betting that a stock’s price will fall can be a dangerous activity. In an inversion of ordinary equity investing, the maximum upside to a short is a 100 per cent decline while the downside is theoretically limitless.

In a brokerage account, a 213 per cent loss would require an investor to post additional funds – equivalent to 113 per cent of their original (now vaporised) investment – just to clear their position. Such considerations are not really built into our weekly ideas, which we largely highlight for the reason that we think investors will find them interesting.

However, we also want to stand by our ideas. And the obvious way to judge them is to rank their performance in both absolute and relative terms. Hence this end-of-year attempt at transparency. Plus, without reflecting on our investing thought processes, we risk repeating mistakes.

Thinking in terms of annual performance, similar to how a fund manager might, runs into several other fiddly caveats.

For a start, very few of our ideas are envisioned as short-term trades, a fact this annual review largely ignores. And while tracking and benchmarking ideas from past years gets increasingly complicated as time goes by, the most recent evidence suggests our buy ideas do ripen with age. A re-run of our 2022 weekly investment ideas shows that their index outperformance increased dramatically over the past 12 months, in terms of both simple and total price returns.

Second, while we have previously ‘closed out’ some of our ideas if the facts, valuations or prices changed soon after our write-ups, it makes less sense to me for our writers to treat their ideas as positions for which they are accountable. Easier, given the hypothetical nature of our directional calls, to see them through to the year’s end.

Lastly, our weekly ideas have little in common with a fund. Their collective performance represents a hypothetical investor who doggedly deploys an equal amount of capital into two investment ideas each week, for 49 straight weeks. As a system, it’s an odd way to invest.

Despite the chocolatey mess – and the pain inflicted in the shape of chemicals group Synthomer (SYNT) – a better year for our ‘buy’ ideas meant our ideas were ever so slightly ahead of their respective indices.

Strip out Hotel Chocolat, and our ideas’ outperformance of their respective indices would have leapt to 2.2 per cent. Given none of our ideas blew the doors off (at least in a positive sense), that points to some commendable stock selection.

As anyone with a stock portfolio can attest, it’s the weighted average that matters. But we can take some comfort from the fact that just under two-thirds of our ideas posted a positive simple price return in 2023. Considering the average publication date for an idea fell in late June, and the fact that the FTSE All-Share is only up around 2 per cent since both the start and middle of the year, our median idea has been worth highlighting.

This year, if there was any bias in our ideas, it was probably towards funds and small-cap stocks; the former for the wide discounts to assets that persisted throughout much of the year, and the latter for their obvious value. If we again exclude the distorting effect of Hotel Chocolat, ideas hailing from the Aim All-Share provided an average outperformance of 7.2 per cent.

Among the biggest successes were cable manufacturer Volex (VLX), whose turnaround we called in early May; Shanta Gold (SHG), whose shares have pushed higher on operational consistency and brighter spot prices for the yellow metal; and sustainable fund manager Impax Asset Management (IPX), whose beaten-up stock we highlighted when markets were at what proved to be a nadir in late October.

Aside from their value credentials, there are good reasons to focus on the junior market. While lower liquidity can cut both ways, smaller stocks are by their nature less widely held, less well covered by analysts, and arguably less well understood by investors. Smallness, while never a virtue in and of itself, can be an indicator of a greater capacity for reinvention and innovation. Despite the example set by the Magnificent Seven tech stocks, competition and disruption often starts from humble origins.

Recent months also suggest they are much more likely to fall prey to larger market animals looking for an efficient source of inorganic growth – or looking to buy a ready-made platform for expansion. This seems a smart theme for investors to tap into in 2024, which is why we may increase our focus on the junior end further. After all, with 17 of this year’s weekly stock ideas sourced from the FTSE 100, we were once again ‘overweight’ the blue-chip index as a source of inspiration.

During 2023, our ideas were most successful when we ventured overseas. In a year in which global equity indices once again outmuscled the UK, we managed to find 12 ideas that returned an average of 8.8 per cent up until 19 December, thanks in large part to the inclusion of a couple of semiconductor manufacturers, US-based Lam Research (US:LRCX) and ASM International (NE:ASM) of the Netherlands.

From January, stewardship of the weekly ideas will pass to my colleague Jemma Slingo. However, the principles that guide our investment ideas are unchanged: an analytical and fundamentals-based approach to stocks, from writers who spend their working lives following their sectors. And while we won’t get every call right, there’s always chocolate for consolation.

Good luck in all your stockpicking in 2024! And look out for our Ideas of the Year, which will be published online at 4.30pm on Thursday 4 January.