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Strategies Review Q1 2017: Growth stocks set the pace
Stock market valuations have been hitting new highs this year, continuing a trend that started after the EU referendum last summer. For many of the 60 guru-inspired investment strategies tracked by Stockopedia, these have been ideal conditions. In the first quarter we saw growth and momentum strategies put in the best performances. But there were some stellar gains right across the strategies spectrum.
In the 2016 review of the gurus, it was interesting to see how different investing methods fared in a year that proved to be a tale of two halves for equities. In the second half, growth strategies leapt ahead, but that led to signs of tension. In particular, the numbers of companies passing some of the classic GARP strategies (growth at a reasonable price) hit very low levels.
If you look at some of the index performances in Q1 of 2017, it’s clear where the action has been. The smaller end of the market like the FTSE SmallCap and the Alternative Investment Market have edged the gains. It’s here where you’re more likely to find fast growth stocks, and that’s reflected in the strategy performances.
| Index / Strategy Composite | Q1 2017 Performance | 12 Months Performance |
| FTSE 100 | +2.5% | +18.6% |
| FTSE All Share | +3.0% | +16.3% |
| FTSE 250 | +4.9% | +12.1% |
| FTSE SmallCap XIT | +5.4% | +16.3% |
| AIM 100 | +11.9% | +36.5% |
| Guru Strategy Composite | +7.0% | +19.8% |
| Growth Composite | +11.4% | +24.9% |
| Bargain Composite | +9.3% | +32.9% |
| Momentum Composite | +7.1% | +23.7% |
| Value Composite | +5.6% | +12.6% |
| Income Composite | +5.3% | +13.5% |
| Quality Composite | +3.6% | +12.8% |
A note about the guru strategies
We’ve been tracking these strategies for five years and the only certainty is that different styles work better in different conditions! So, short-term performance statistics are just a snapshot of activity, and not necessarily a basis for making investment decisions. Nonetheless, it’s interesting to see how these different styles react to changing conditions and the types of companies they pick up.
For those new to Stockopedia, these strategies encompass a range of approaches used by some of the world’s best known investors. They’re categorised as either Quality, Growth, Value, Bargain, Income or Momentum.
Each strategy has its own set of rules, and we constantly screen the market for companies that meet them. At the end of each quarter, the companies passing the rules are held in a portfolio for each strategy, which we track. These models aren’t always realistically investable, and sometimes there may be few companies that meet the rules of some of them. In addition, we don’t account for the drag of trading costs or the bonus of dividend payments.
Growth leads the way in Q1
The aggregate gain of the 10 guru-inspired Growth strategies in the first quarter was 11.4%. At the start of the period there were noticeably low numbers of stocks passing some of them. But those that did pass delivered some impressive results.
The Growth at a Reasonable Price screen was a prime example. It led the way with a 26% gain, but with just three holdings in Mondi, IQE and 3i, it was a throwing out very few ideas. Diversification in this strategy remains a problem going into the second quarter. That’s perhaps a sign that some growth stocks are failing strategies that are strict in their definition of ‘reasonable price’.
The Jim Slater-inspired Zulu Principle screen also struggled for diversification earlier this year, but things have now improved. The strategy finished the quarter up 7%. It was better news with the Charles Kirkpatrick Growth screen, which nudged a 15% gain. Here there was more to go at, and the portfolio flew with holdings like Boohoo.com, Sanne and Victoria. Finally, a growth strategy modelled on William O’Neil’s proprietary CAN-SLIM approach managed a 12% gain.
Momentum strategies led by mining stocks
In strong markets, it’s no surprise that some Momentum strategies did very well in Q1. One of the interesting features here, though, was how a whole sector dominated some of them.
Mining stocks staged a long-awaited recovery in 2016, which was a huge win for value investors. This swing in sentiment forced up prices across the sector late last year and into 2017. The Price Momentum screen was dominated by these stocks and delivered an 18% gain on the back of them. Smaller, more speculative miners remain a big presence in the portfolio, although it is more balanced moving into Q2.
Interestingly, miners also featured widely in the Earnings Upgrade Momentum screen in Q1 – and the portfolio returned 10%. But, again, there’s more balanced exposure in the portfolio going into Q2. There are still some large mining groups that are seeing strong EPS forecast upgrades, but not as many. Instead, financial and insurance stocks have much more presence.
Meanwhile, the Richard Driehaus-inspired price and earnings momentum strategy saw a 12% gain with winners including Gama Aviation and Impax Asset Management. While the Josef Lakonishok strategy returned 11% with big gains in stocks like Bioventix, IQE and Somero Enterprises.
Value strategies hold up well
On the value scale, it has been the Bargain strategies that have really dominated the performance stats over the past year. These strategies take a very strict approach to valuation, which means they ought to work best in bullish conditions or after strong sell-offs. At that point, they can pick up better quality stocks at cheap prices.
In buoyant markets these screens fill up with highly speculative micro-cap stocks in sectors like oil amp; gas and biotech. But there can be no argument that many of these stocks have been lifted in the current environment.
The Ben Graham NCAV strategy notched up a 22% gain in the first three months of the year. It did it with stocks like Management Consulting, Minoan and Rurelec. The Negative Enterprise Value screen did even better, at 26%, with companies like Chariot Oil amp; Gas and Crossrider. In practice, shares like these may well suffer from wide spreads, low liquidity and high volatility.
In aggregate, the 16 Value strategies managed a gain of 5.6% in the first quarter, but there were some strong double-digit returns in there. The Ben Graham Deep Value Checklist, Bill Miller Contrarian Value and Piotroski F-Score (Low Price-to-Book) strategies all delivered returns of over 20%.
Mixed results from Quality amp; Income strategies
The guru-inspired Quality strategies cover a wide range of approaches to ‘quality’. One of the best performers since last summer, including a 16% gain in Q1, is the Ramp;D Breakthroughs screen. This is an interesting take on quality because it’s designed to look for stocks that are ploughing cash into Ramp;D, which drags down earnings and may artificially depress share prices.
This screen looks to have hit a sweet spot in the current environment. At the turn of the year it was dominated by small-cap biotech, pharma and technology-oriented stocks. The results have been volatile and there were some big losing positions. But many more have done very well indeed, such as Petro Matad, Plant Health Care and Summit Therapeutics. These are not stocks that fall into more conventional definitions of ‘quality’, but they’ve nevertheless worked well for this strategy in recent months.
Elsewhere, the Ronald Muhlenkamp Return on Equity screen posted an 8.6% gain on a fairly small portfolio. But a more eye-catching performance came in the Joel Greenblatt Magic Formula screen. It saw a gain of 6% in Q1, but that takes it to a one year return of over 26%. In the current conditions, Greenblatt’s blend of quality and value is working very well. Some of the better performing stocks from the MF portfolio were Communisis, Somero Enterprises, Gama Aviation and RM.
Finally, among the Income strategies there was a return to some familiar patterns of performance that we’ve been used to in recent years. Among the highlights, Winning Growth and Income saw a 15% gain, Best Dividends was up 10%, Dividend Achievers returned 7%, while Quality Income saw a gain of 5%.
What to expect from the gurus this spring?
The performance of the guru strategies in the first quarter of 2017 reinforces the view that investors are “risk on” right now. Growth and momentum strategies are handy barometers of sentiment in these conditions. We’ve seen impressive gains in some growth shares in recent months, but there’s evidence that they could be getting expensive. With momentum, the mining sector still leads the way, but there are signs of other sectors beginning to creep in.
More broadly, rising markets seem to be benefiting stocks across the board. There have been some strong gains in the smaller, more speculative areas of the market. It could be that investor enthusiasm is spilling over into potentially dangerous territory.
The economic outlook could hardly be less predictable given the forthcoming Brexit negotiations. Yet low interest rates and reasonable economic conditions are good news for stocks at present. So it’s hard to see why there should be any major changes of fortune for the gurus in the coming months.
You can explore all of the guru-inspired strategies tracked by Stockopedia here.
Source: http://www.stockopedia.com/content/strategies-review-q1-2017-growth-stocks-set-the-pace-179084/
