Tips of the Week Review 2019

A year of change

When I wrote this review last year, I said readers could expect to see changes in the way we went about tipping shares during 2019. With hindsight, it would have been better to have said readers would “experience” changes. That’s because the changes that have been made to our tips process – and they have been quite substantial – have been kept out of sight. Behind the scenes we’ve been busy, though. While it is always dangerous to read too much into relatively short-term results, we hope these behind-the-scenes efforts are reflected in the encouraging performance of the weekly tips from the past 12 months. 

During the year we’ve sought to improve three aspects of the Investors Chronicle’s share tipping process: idea generation; analysis; and judgment. This year we plan to make these changes more explicit in the tips section of the magazine and make them of more value to readers. Here’s what we’ve been doing to improve our tips process during 2019:

1. Idea generation

During the year we’ve increased the focus we put on certain cues from the market to direct our writers’ research efforts. We’ve done this by instigating weekly screens shared across our writing team that monitor momentum, broker forecast changes, fund manager best ideas, director dealings and short-selling activity. We plan to make highlights from this ideas gold mine accessible to readers during the coming year. 

We’ve also been using the regular screens that feature as part of our IC Alpha reports to generate ideas. Our hope is that by piggy-backing on these Alpha screens, the Alpha publication will create value for readers that subscribe only to the magazine, as well as more value for those who pay for extra Alpha content.

2. Analysis

To help focus our research efforts we’ve created a standard analysis tool that highlights key performance trends and red flags, along with a number of important momentum and valuation measures. 

In particular the 10 red flags we now systematically monitor – often hidden in companies’ balance sheets and cash flow statements – can be particularly helpful in avoiding trouble. These red-flag ratios include five-year histories for: receivables/sales (whether customers are paying invoices in a timely manner);  stock/sales (the proportion of cash cost of sales kept off the income statement), the level of adjustments made to reported profit; and 5-year cumulative free-cash conversion (whether profits turn into cash over the long term). While not all red-flag warnings turn out to be a genuine reason for concern, investigating any warning signs is very important and is now more deeply ingrained in our writers’ analysis. 

3. Judgment

The last half century has seen a burgeoning understanding of the psychology of decision-making and judgment. This has provided the foundations for a field known as behavioural finance. A key insight is that the human mind struggles to pull together large amounts of complex, and often seemingly contradictory, information to make black-and-white (buy/sell) investment decisions. 

Since the middle of June, alongside our buy and sell recommendations, we’ve been using a stock scoring system that attempts to unbundle the judgments our writers have to make to form a buy or sell view. The system draws heavily on research into what 'factors' (stock characteristics) influence investment returns as well as lessons from behavioural finance. 

The key purpose of this scoring system has been to support our writers when they come to decide whether a share rates a buy, sell or hold. However, while the system has only been in operation for a relatively short period of time, it’s of real interest to us that the near half of tips that have fallen into the 'sweet spot' for our scoring system since mid-2019 have so far performed significantly better than the tips overall. 

What does it all mean?

Enough about the changes made to the tips process last year and on to the meat: how last year’s tips performed. 

As already mentioned, 2019’s Tips of the Week produced strong returns overall and on aggregate represent the best performance for a number of years. But before digging into the details, there are some key features of this review that are important to highlight. The first is that this magazine makes a lot of share tips and inevitably this means the average performance of the weekly tips will tend towards the average for the market (what statisticians call reversion to the mean). The sheer quantity of tips the magazine provides also means there will almost always be some shares that do very badly as well as others that do very well. 

Meanwhile, although this is a review of a year’s worth of tips, as the tips being reviewed are issued throughout the year, the average holding period being assessed is a bit under six months. The average figures given in this review should therefore be regarded as six-month (ish) performance and not one-year performance. 

Buy tips are considered closed when we move our recommendation to sell, while sell tips are considered closed when we move our advice to either hold or buy (ie off a sell rating).

To calculate relative performance, shares are measured against the most closely fitting of the FTSE 100, FTSE 250, FTSE All Small, FTSE Aim All-Share or most relevant international index. 

The performance figures do not include contributions from dividends or the impact of dealing spread (the difference between the price shares can be bought for and sold at). Including these factors would have shaved about 0.8 per cent off the overall performance of our buys. This calculation is based on the average buy from the year having a spread of 0.5 per cent and on average offering a dividend yield slightly below that of the market at 2.6 per cent compared with 2.9 per cent. The spread on the sells was 0.3 per cent. The average sell’s dividend yield is 3.4 per cent, however this historical figure is somewhat misleading as many of our sell tips are made on shares in companies that have already announced future dividend cuts or are expected to cut in the future.

With all this in mind, the average performance of our 139 buy tips in 2019 is 5.8 per cent better than the market, which represents a 14.3 per cent gain in absolute terms. Meanwhile, 65 per cent of the buys have outperformed the market. The success rate for sells is worse, with only 43 per cent performing worse than the market. However, having identified a number of big fallers, the sells still underperformed the market on average by 3.0 per cent, although given the overall strength of the market, in absolute terms this translated into a 3.8 per cent gain. 

The detail

As usual, during the year we’ve tried to provide readers with ideas incorporating a range of investment approaches and market capitalisations. The charts and tables below are really the best way of assessing the breakdown. This year our tips have shown a bias towards 'growth' stocks, although the performance of this style of tip (a capital gain of 17.2 per cent and 8.3 per cent outperformance) has arguably helped justify the tilt. 

The only type of buy tips that have underperformed during the year are the high-risk 'speculative' tips we’ve made, which have gained 7 per cent but are 1.1 per cent behind the market. Indeed, all of the five worst performing buy tips from the past 12 months fell into our 'speculative' category. 

The charts below provide  a more detailed breakdown of the parts of the market our tips came from, the proliferation of different tip styles, and a performance breakdown on the same basis. The two accompanying tables, meanwhile, provide details of all the buy and sell tips issued during the year. 

All the buys

Source: S&P CapitalIQ

All the sells

Source: S&P CapitalIQ