Proactive Investors - Run By Investors For Investors

2017 review: A watched Stockpot sometimes boils

Stuck pots
The first stab at a momentum-based recovery stocks virtual portfolio started in March with £10,000

The Stockpot column was inaugurated to act as a laboratory for investment ideas, and like a lot of lab experiments, some things went horribly wrong.

Bombed Out but Bouncing Back portfolio

If our experiment on bombed out stocks that were supposedly on the comeback trail were an alien, the prognosis from Star Trek’s Dr “Bones” McCoy would be: “It’s dead, Jim”.

The first stab at a momentum-based recovery stocks virtual portfolio started in March with £10,000 and a simple idea: buy stocks that were on a rising trend over the last month that had lost more than a third of their value over the last year.

By July, the £10,000 portfolio was worth less than £5,000 and the experiment was abandoned.

During that time it had made a ludicrous 224 trades, burning up an assumed £3,360 in dealing costs, reinforcing my dislike of frequent trading.

A few tweaks were made to the algorithm, largely to eliminate trades on stocks with ludicrously wide spreads, and off we went again in late July with another (thankfully theoretical) £10,000.

Was the performance of the tweaked version any better?

Was it heck as like!

Well, it was a little better, in the same way Beelzebub is a little better than Piers Morgan …

At the time of writing, the portfolio is valued at £5,606 and has just one stock in it: Dixons Carphone Plc (LON:DC).

It is time to punt the tweaked version of the Bombed Out portfolio into the long grass.

What we have learnt from this experiment is that investors nursing heavy losses will be happy to sell to any sap lured in by a rising trend … don’t be that sap. 

The Aim stocks sustainable dividends portfolio

The idea of this portfolio was to have the best of both worlds: the growth stock potential of companies listed on London’s junior market and a bit of dividend income.

The focus was not on the highest yielders – indeed, stocks with too high a yield were rejected – but on those companies that looked capable of paying a rising dividend over a prolonged period of time, backed by solid earnings, good cash flow and with low debt levels.

It’s a “buy and hold” strategy, and there’s an old adage that goes “buy and hold” is the strategy you adopt when your short-term punt goes pear-shaped, but for this portfolio it really is a case of letting the companies grow their dividends over a period of years and waiting for the market to take notice.

From all of which you may deduce that the portfolio is currently underwater. With £6,000 out of £10,000 invested, the six stocks are, in aggregate, down £471.

Give it time.

Selectively bred dogs of the Footsie: a howling success

The Proactive Investors take on the well-known “Dogs of the Dow” strategy proved to be the year's best bet.

The original strategy, devised by Michael O'Higgins, simply took the 10 highest yielding stocks in the Dow Jones 30-share average and bought them in equal amounts; then sold the lot a year later and repeated the whole exercise.

It's a tried and tested strategy that works particularly well in the US where companies are extremely loath to cut their dividends; it must be some kind of American corporate macho thing.

In the UK, companies are reluctant to cut the dividend but occasionally bite the bullet, often prompting what it called a relief rally.

Be that as it may, it turns out that the “Dogs of the Dow” principle works very well when applied to the FTSE 100.

READ: Selectively breeding the Dogs of the Footsie

We tweaked the principle slightly to screen out stocks where the dividend looked unsustainable – and yet we still ended up with BT in the portfolio!

We did this by using broker forecasts for the current year's dividend rather than the more traditional method of calculating the yield on the basis of last year's dividend payment.

As an extra fail-safe we screened out any stocks where the forecast dividend was not covered at least 1.5 times by forecast earnings – and still we ended up with BT in the portfolio!

To be fair BT has not cut its divi as some thought it would, though the stock has performed badly in 2017.

The full list of Footsie dogs is: AstraZeneca, Barratt Developments, BT Group, Capita Group (now no longer in the FTSE 100), Legal & General, Marks & Spencer, Persimmon, Royal Mail (see comments about BT!), TUI and Taylor Wimpey.

The portfolio as a whole, including dividend payments, was worth (at the time of writing) £11,096, which is a good return on the initial £10,000 investment, especially when you consider we started the portfolio at the end of January rather than at the end of December.

Of the £1,096 profit, £469 came from dividend payments, which means the portfolio yielded a very handy 4.69%.

The best performers were the house-builders: Persimmon was up 39%; Barratt Developments was up 32%; and Taylor Wimpey was up 21%.

Holiday group TUI stopped the house-builders from occupying all three top spots; it returned 28% on the year.

Royal Mail, for all its perceived problems with the pension deficit, a declining letters delivery business and a bolshie workforce/callous management (delete according to political prejudice), did quite well, returning almost 9%.

BT, sadly, did not, shedding 13%, with sentiment not helped by the accounting irregularities in the Italian business.

High Street stalwart Marks & Spencer also lost ground, falling 9%, but the worst performer was outsourcing outfit Capita, which lost 20% and its place in the top shares index.

‘Dividends don’t lie’ tracks the Footsie

Our last portfolio under review is based on the investment principles of Geraldine Weiss, the “grand dame of dividend stocks”.

It kicked off in February, and has slightly outperformed the FTSE 100.

Including dividends, the portfolio is up 6.3% year-to-date (or 4.7% when dealing costs are factored in), thanks largely to student accommodation company Unite Group PLC (LON:UTG), which has risen 23%.

The move into temporary heating provider Aggreko PLC (LON:AGK) was less successful, with the stock down 9.6%, but at least the dividend was held.

The portfolio’s other stock, environmental services group RPS Group PLC (LON:RPC) had a pedestrian year, rising about 3%.

John-H.jpg


Register here to be notified of future PROAC Company articles

© Proactive Investors 2019

Proactive Investors Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use