For most investors, the best long-term rewards come from finding an investment approach with strong intuitive appeal and sticking with it. The reason for this is that the best returns are normally achieved by applying a good strategy through thick and thin, and the easiest way to achieve this through the 'thin' times is by focusing on an approach that makes strong guttural sense.
However, while investors are normally best advised to stick to their knitting, the market is much more fickle in the strategies and approaches it chooses to reward over any given period. On that basis, the knitting that this week’s screen attempts to stick to is the fickleness of the market itself.
My strategy screen works by first assessing what individual single-factor, stock-picking strategies have had the most influence on returns over the past three months. After that, a screen is created based on the top three factors.
Last year, for the first time in the five years I’ve run this screen, it underperformed the market with a negative total return of 6.3 per cent, compared with 2.0 per cent from the FTSE All-Share. However, since inception the screen’s results have been impressive, producing a cumulative total return of 109 per cent compared with 43 per cent from the FTSE All-Share. If I add in a 1.25 per cent annual charge to account for the notional cost of reshuffling the portfolio each time the results of a new screen are published, the return falls to 96.5 per cent.
2017 performance
| Name | TIDM | Total return (13 Mar 2017 - 7 Mar 2017) |
| St Ives | SIV | 50% |
| Royal Mail | RMG | 43% |
| International Personal Finance | IPFI | 34% |
| Communisis | CMS | 31% |
| U+I | UAI | 20% |
| Royal Bank of Scotland | RBS | 7.8% |
| Helical Reit | HLCL | 6.2% |
| Vodafone | VOD | 6.1% |
| P2P Global Investments | P2P | 5.8% |
| Standard Chartered | STAN | 5.5% |
| Mitchells & Butler | MAB | 3.4% |
| Premier Foods | PFD | -6.8% |
| Barclays | BARC | -6.9% |
| EI | EIG | -12% |
| Drax | DRXG | -18% |
| Virgin Money | VM. | -18% |
| Trinity Mirror | TNI | -24% |
| Soco International | SIA | -26% |
| Gem Diamond | GEMD | -27% |
| First Group | FGP | -30% |
| Gulf Marine Services | GMS | -38% |
| Debenhams | DEB | -44% |
| Countrywide | CWD | -48% |
| HSS Hire | HSS | -64% |
| Strategy Screen | - | -6.3% |
| FTSE All-Share | - | 2.0% |
One could view the strategy screen as taking the concept of momentum investing and applying it to investment styles. This year, I’ve added two extra single-factor strategies to those being assessed.
One of the new strategies is based on picking shares in companies experiencing significant broker forecast upgrades over the past 12 months (based on average upgrades to forecasts for the current financial year and next financial year). Over recent years, the screens monitored by this column that employ forecast upgrades as a primary or supporting criteria have produced some very impressive returns. This strategy came out as one of the top three assessed by this year’s screen. The other new strategy is based on targeting stocks that look cheap on the basis of their enterprise-value-to-cash-profits (EV/Ebita) ratio, which is a valuation metric often favoured by acquirers of companies.
The screen now looks at 11 single-factor strategies to see what has been working best, and the results over the past three months can be seen in the table below. The assessment of the strategies is based on tracking the three-month performance of the most attractive fifth of FTSE All-Share stocks, as of three months ago, based on each of the 11 different factors. Over the past three months eight of the 11 factors have outperformed the FTSE All-Share with a strong bias towards strategies targeting earnings and price movement (four of the top five).
After identifying the top-performing strategies the second step of the strategy screen is to look for stocks that rank among the top fifth for each of the top three factors: forecast EPS growth; forecast EPS upgrades; and 5-year EPS compound annual growth rate (CAGR).
Normally extremely few stocks if any can satisfy all three criteria, so by past standards this year’s five fully-qualifying shares count as something of a bumper haul. All the same time, I have used the tactic employed in previous years to plump out the screen results. This involves highlighting shares that are among the most attractive fifth based on the strongest factor of the past three months (forecast EPS growth) and are among the most attractive fifth of shares based on one of the other two top factors. Doing this increases the number of strategy-screen share picks from five to 28. The stocks passing all the tests are listed at the top of the table and are ordered by forecast EPS growth.
I’ve provided write-ups of three of the five fully-qualifying shares, with the other two fully-qualifying shares having recently featured as write-ups accompany two other screens: KAZ Minerals (KAZ): Great Expectations, 16 Jan/JD Sports (JD.): O’Shaughnessy Growth, 7 Mar.
2018 Strategy Screen picks
| Name | TIDM | Market cap | Price | Fwd NTM PE | DY | PEG | Three-month momentum | Av 12-month EPS upgrade | Av 2-year fwd EPS grth | 5-year EPS CAGR | Net cash/debt(-) | Test failed |
| Ashtead | AHT | £9.4bn | 1,918p | 13 | 1.4% | 0.8 | -3.9% | 16% | 23% | 51% | -£2.6bn | na |
| KAZ Minerals | KAZ | £4.0bn | 900p | 8 | - | 0.6 | 24% | 39% | 21% | 52% | -$2.1bn | na |
| Dechra Pharmaceuticals | DPH | £2.6bn | 2,544p | 34 | 0.8% | 5.0 | 23% | 13% | 18% | 91% | -£99m | na |
| JD Sports Fashion | JD. | £3.8bn | 386p | 16 | 0.4% | 1.3 | 16% | 9% | 17% | 42% | £223m | na |
| Workspace | WKP | £1.5bn | 943p | 24 | 2.2% | 1.1 | 0.4% | 10% | 16% | 26% | -£442m | na |
| U+I | UAI | £249m | 199p | 6 | 4.4% | - | 9.1% | 48% | 64% | - | -£189m | 5yr EPS CAGR |
| Antofagasta | ANTO | £8.7bn | 884p | 16 | 1.5% | 1.7 | -1.9% | 35% | 52% | -23% | -$860m | 5yr EPS CAGR |
| Greencoat UK Wind | UKW | £1.2bn | 121p | 15 | 5.3% | 0.0 | 2.7% | 436% | 49% | - | - | 5yr EPS CAGR |
| Sports Direct | SPD | £2.0bn | 371p | 19 | - | 0.2 | -3.1% | 31% | 44% | 7.6% | -£472m | 5yr EPS CAGR |
| Beazley | BEZ | £2.8bn | 540p | 16 | 2.1% | 0.7 | 12% | 16% | 44% | -10% | $64m | 5yr EPS CAGR |
| Phoenix | PHNX | £3.1bn | 782p | 13 | 6.4% | - | 5.0% | 69% | 41% | - | -£243m | 5yr EPS CAGR |
| NMC Health | NMC | £7.0bn | 3,358p | 39 | 0.3% | 1.3 | 11% | 23% | 39% | 21% | -$1.0bn | 5yr EPS CAGR |
| Speedy Hire | SDY | £272m | 52p | 15 | 1.9% | 0.6 | -8.1% | 20% | 38% | 11% | -£63m | 5yr EPS CAGR |
| Ferrexpo | FXPO | £1.8bn | 315p | 7 | 1.5% | 0.4 | 26% | 77% | 29% | -5.2% | -$481m | 5yr EPS CAGR |
| Clipper Logistics | CLG | £413m | 411p | 26 | 1.8% | 1.3 | -2.7% | 12% | 26% | - | -£40m | 5yr EPS CAGR |
| easyJet | EZJ | £6.1bn | 1,553p | 14 | 2.6% | 0.9 | 8.5% | 26% | 24% | 4.5% | £357m | 5yr EPS CAGR |
| Fenner | FENR | £910m | 469p | 21 | 0.9% | 1.2 | 24% | 46% | 23% | -10% | -£101m | 5yr EPS CAGR |
| Wizz Air | WIZZ | £2.5bn | 3,417p | 15 | - | 0.9 | -0.1% | 25% | 22% | - | €997m | 5yr EPS CAGR |
| Electrocomponents | ECM | £2.7bn | 603p | 21 | 2.0% | 1.4 | -2.3% | 26% | 21% | 8.7% | -£126m | 5yr EPS CAGR |
| Centamin | CEY | £1.8bn | 152p | 14 | 5.9% | 1.0 | 12% | 14% | 21% | -12% | $360m | 5yr EPS CAGR |
| Arrow Global | ARW | £611m | 349p | 9 | 2.6% | 0.8 | -6.5% | 4% | 21% | 26% | -£902m | EPS Upgrades |
| Vodafone | VOD | £54bn | 203p | 21 | 6.5% | - | -10.0% | 24% | 21% | - | -€32bn | 5yr EPS CAGR |
| Countryside Properties | CSP | £1.4bn | 310p | 9 | 3.2% | 0.6 | -9.0% | 14% | 21% | - | £77m | 5yr EPS CAGR |
| Games Workshop | GAW | £747m | 2,310p | 15 | 4.3% | 1.2 | 12% | 124% | 20% | 26% | £29m | 5yr EPS CAGR |
| B&M European Value Retail | BME | £4.2bn | 424p | 22 | 1.4% | 1.5 | 7.6% | 13% | 20% | - | -£584m | 5yr EPS CAGR |
| Gocompare.com | GOCO | £473m | 113p | 14 | 1.2% | 1.0 | 16% | 13% | 20% | -43% | -£39m | 5yr EPS CAGR |
| Smurfit Kappa | SKG | £8.0bn | 3,042p | - | - | 0.0 | 33% | 10% | 18% | 11% | -€2.8bn | 5yr EPS CAGR |
| Vp | VP. | £335m | 850p | 11 | 2.6% | 0.8 | -5.6% | 16% | 18% | 17% | -£115m | 5yr EPS CAGR |
Source: S&P CapitalIQ
Ashtead
US-focused equipment rental business Ashtead (AHT) saw its shares sink early this month when it reported third-quarter results. However, the problem was not an end to the upgrade cycle that this screen has latched on to. Indeed, the third-quarter result, which reported a 24 per cent increase in underlying sales and a 22 per cent rise in pre-tax profit, had brokers nudging their earnings expectations upwards, with Liberum, for example, giving its 2019 EPS predictions a 3 per cent bump.
The cause of anxiety was a slightly worse than expected third-quarter cash profit margin of 44.6 per cent. To focus on this may seem odd at a time when volume growth seems to be outstripping forecasts and management is increasing capital expenditure in expectation of continuing strong demand. However, Ashtead is a highly capital-intensive business with cyclical end markets and its profits are very sensitive to relatively small changes in costs and sales. That means it doesn’t take much to get investors worried.
However, the nature of the margin pressure felt by Ashtead in its third quarter may actually prove to be a reason for celebration for those willing to take a longer-term perspective. The issue for the company is that conditions in its core US market are so buoyant its costs are going up as it has to fork out more to get the quality of staff it needs. This type of cost increase is normally a precursor to a rise in hire rates. The 3 per cent increase in rates in the third quarter already looks encouraging from this perspective.
As well as strong economic conditions, Ashtead is benefiting from a long-term trend in the US away from equipment ownership in favour of rental. While debt is an important source of financing its rental fleet, which adds to the risks as well as rewards for shareholders, borrowings look fairly well balanced with Capex at the moment and management has found enough give in the balance sheet to buy back shares in order to enhance shareholder returns.
Dechra
Acquisitive veterinary pharmaceuticals company Dechra (DPH) is riding some noteworthy long-term growth trends. In the developed world pets are increasingly being 'humanised', which means their owners are willing to spend ever larger sums on the kind of medicines Dechra produces. Meanwhile, rising demand for meat and dairy from emerging markets is driving demand for medicine for livestock.
Dechra has been attempting to take advantage of these trends through a series of acquisitions. This helped the group achieve very strong first-half trading in the US in its current financial year, where it has also invested in expanding its salesforce. Meanwhile Europe is expected to provide a second-half boost following two recent Dutch acquisitions. US tax changes have also helped the bottom line.
A relatively fixed cost base means rising sales are having a very virtuous effect on the group’s margins and helping fuel an upgrade trend. Broker Investec forecasts that operating margins will rise from 22.6 per cent in 2017 to 27.0 per cent by 2019. What’s more, the broker believes its predictions look conservative given the strength of recent trading, teeing Dechra up for further upgrades.
It’s not only rising demand and the benefit of acquisitions that provide reasons to hope for positive surprises. The company has invested a considerable amount in drug development, and success here could come with considerable upside. That said, all this potential does not come cheap.
Workspace
Like Ashtead and Dechra, Workspace’s (WKP) recent success and its growth potential is founded on a long-term structural growth trend. In its case, the trend is the increased desire of businesses to keep their asset bases as flexible as possible. While Ashtead specialises in offering flexibility for companies that use equipment, Workspace is focused on property; specifically, 66 London properties housing 3.6m square feet (sq ft) of flexible workspace available on short-term leases. The business has a reputation for operational panache and demand for its properties appears strong, with new centres opened last year filling fast and an impressive level of enquiries turning into lettings.
Unlike some other flexible office space providers such as IWG and US company We Work, Workspace is focused on freehold ownership of its properties, giving the shares strong asset backing. The upfront cost of buying properties, as opposed to leasing them, makes growth slower and more capital-intensive at the outset. But Workspace’s strong balance sheet does put it in a good position to invest in new buildings. It ended 2017 with loans representing less than a fifth of the value of its properties and earlier this year bought a property in Camden for £109m. In addition to this purchase, 483,000 sq ft of new and refurbished space is expected to be completed this year.
While the price/earnings ratio commanded by Workspace’s shares may look on the high side, it does trade at a discount to 2018 forecast net asset value of 9 per cent. And while the dividend yield offered by the shares is far from knockout, the payment does boast the attraction of having grown at a compound rate of 18 per cent over the past three years.
