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Bombed out but bouncing back- a virtual portfolio of recovery stocks

Published: 13:25 07 Mar 2017 GMT

Big bomb

The stock market is full of adages masquerading as investment advice. Here is a couple you might have heard of.

  • “Be fearful when everyone’s greedy, and be greedy when everyone’s fearful”.
  • Never catch a falling knife.

The first is attributed to Warren Buffett, the Sage of Omaha and general all-round investment genius.

It speaks of the opportunities there are to make a buck when people over-react to a bit of bad news or, alternatively, to save a buck when people appear to be getting carried away investing in the shares of the tailor who made the emperor’s new clothes.

The second adage advises investors to avoid buying a plunging share just because it is considerably cheaper than it was last week/yesterday/five minutes ago (delete as applicable).

The argument goes that a plunging share price is plunging for a reason, and those who are still holding it are either deluded or just waiting for an opportunity to offload their shares onto some other sucker.

What happens, however, when a falling knife stops falling?

No one ever turns to former Crystal Palace manager Iain Dowie for investment advice, but he did coin the word “bouncebackability”, which I am going to purloin to describe bombed out-shares that have demonstrated said ability.

I’ve run a very simple stock screen to identify hard hit shares that have shown bouncebackability.

The shares must have fallen by at least a third in value over the last year to qualify as “bombed-out”.

To qualify as “bouncing back” they must have gained at least 2% in the last five trading days, advanced 4% in the last 10 trading days and risen 10% in the last month.

Why those particular thresholds?

Dunno, guv. Why not?

Likewise, I’ve also sought out shares whose current share price has risen above the 50-day moving average.

I have no idea why it has to be 50 days; it’s probably a tradition, or an old charter or something.

The point is, chartists – the technical analysts who gaze at graphs, not the 19th century protestors – swear by the 50-day moving average, and not to fall into line would be like decrying palmistry, voodoo economics or claiming the earth is not flat.

Sceptical?

Me?

Running the screen is fairly easy to do. Turning it into a portfolio is a bit more onerous because as I understand it, these technical analysis chappies like to indulge in day trading.

I don’t know about you but I’ve got a bean bag that needs stuffing with beans and a fence that needs creosoting, and both of these activities are more appealing to me than day trading (as would be watching the creosote dry after I have applied it), so were we to create what I am going to call the BOBBB (bombed-out but bouncing back) portfolio we’ll do it on the basis of trading once a week, on a Tuesday.

Ordinarily when running a virtual portfolio I would not bother factoring in trading commissions and bid/offer spreads (the difference between the price at which you sell and the price at which you buy) but in an actively traded portfolio these sorts of hidden costs can quickly pile up.

Plus, I will freely admit, I want to load the dice against the success of this experiment, because I am more of an investor than a trader, and I do not much like the taste of humble pie.

Introducing the bouncing bombs

The screen returned 10 candidates, which is a reasonable number for a (virtual) portfolio.

I’ll probably cap the portfolio’s size at 10, giving favour to those BOBBB shares where there has been some director buying in the last three months, and excluding those where the directors have been selling.

Otherwise, the “sort order” will be determined by the % change over the last five days score, highest to lowest; after all, if you are going to buy into this momentum lark, you might as well go all in.

Company

% change

1 year high (p)

Price (p)

5 day

10 day

1 month

Snoozebox Holdings

46.2

35.7

35.7

3.125

0.475

PCG Entertainment

39.6

27.6

60.9

1.4

0.185

Andalas Energy

34.1

25

22.2

1.17

0.1375

Frontera Resources

15.4

8.43

221

0.54

0.225

Tandem Group

14.6

14.6

14.6

177.5

117.5

Trinity Capital

13.8

13.8

13.8

6.625

0.925

Trading Emissions

8.5

27.6

12.3

7.41

2.425

ECR Minerals

8.1

45.7

31.4

5.5

1.675

Entu (UK)

5.9

9.1

16.1

68.5

27

Agriterra

15.8

19.7

51.9

0.445

0.1975

 

Now I look at that table, I wonder whether I should be restricting the purchases to those where the trend over five days-10 days-one month has continued upwards.

If I did so, that would exclude PCG, Frontera, Trading Emissions, ECR, Entu and Agriterra, leaving us with just four stocks.

Let’s leave them in and see how the decelerating six do compared to the accelerating four.

In for a penny, in for £10,000

Here’s what we get when we invest a virtual £10,000, factoring in bid/offer prices and a £15 dealing fee for each transaction.

Let’s have a look at those bid/offer spreads first, some of which look painful and frankly bonkers; Trinity Capital and Trading Emissions both need to double in price just to break even. 

As I mentioned, this is just a virtual £10,000 and it is an experimental portfolio. If you are considering putting real money into the same stocks then as the old gag has it, I own some De Lorean shares you might be interested in buying.

Purchases

  • Snoozebox: 179,100 shares bought at 0.55p each
  • PCG Entertainment: 518,400 shares at 0.19p each
  • Andalas Energy: 704,000 shares at 0.14p each
  • Frontera Resources: 428,000 shares at 0.23p each
  • Tandem Group: 788 shares at 125p each
  • Trinity Capital: 80,400 shares at 1.225p each
  • Trading Emissions: 33,000 shares at 3p each
  • ECR Minerals: 58,000 shares at 1.7p each
  • Entu (UK): 3,500 shares at 28p each
  • Agriterra: 492,000 shares at 20p each

We’ll revisit the portfolio next Tuesday to see how it is doing and do some transactions, but I can tell you that based on mid-market prices five seconds after “buying”, the portfolio was already £1,635 in the red (and that would have been much worse had I used bid prices to value the shares), so there had better be some wild movements to make this strategy work.

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