Four £1 million portfolio strategies

Earlier this week we looked at finnCap's new stock-screening system which, the City broker claims, makes it far easier to identify the best companies in the UK small/mid-cap sector.

A hypothetical £1 million portfolio of 30 shares was packed with interesting companies, but finnCap also drilled down and built portfolios to capitalise on quality, value, growth and momentum (QVGM).

To recap, finnCap's screening system "The Slide Rule" is a quantitative analysis tool able to screen or rank stocks on any number of criteria or valuation performance metric. There is no active stock-picking involved.

"The Slide Rule has been designed to dramatically simplify the identification of the best companies in the UK small/mid-cap sector by making a quantitative assessment of the relative potential of each company," explains finnCap's head of research Raymond Greaves.

Quality

Running a screen for "quality" - the first of the four performance metrics - finnCap has named the 30 companies ranked highest by the Slide Rule on this measure.

This screen uses three metrics: return on capital employed - dividing operating profit by capital employed; return on capital employed - dividing equity free cash flow by capital employed; and gross debt to capital employed.

A notional £1 million has been invested equally across the 30 highest-"quality" companies (listed below). Back-testing showed a total return of 8.6% for the fourth-quarter of 2016.

As it is for all four portfolios, the selection process will be re-run and the proceeds, including dividends received during the previous quarter, will be re-invested equally across the new Top 30.

Value

A "value" screen used four metrics: enterprise value/consensus operating profit forecasts for the current financial year; price/earnings (PE) ratio; dividend yield; and free cash yield - free cash flow divided by market capitalisation. It returned 0.5% in the fourth quarter, dividends offsetting a 1.1% decline in capital.

Growth

A "growth" stock screen did well when run for the final three months of 2016. Using revenue growth - compound annual growth rate (CAGR) over two years from the last reported figure - and operating profit growth, it returned 6.7%.

FinnCap's latest screen for the first quarter of 2017 has generated the following stocks for its £1 million portfolio of 30 highest-growth companies.

Momentum

A hypothetical £1 million "momentum" screen used the net number of earnings upgrades/downgrades for a given company for the current forecast year over the past 12 months. A second metric - share price momentum - was positive if the 50-day moving average exceeded the 200-day moving average.

In the fourth quarter, the screen returned an impressive 9.5%, mostly capital gains.

Three more screens

In addition, finnCap has tested the Slide Rule's effectiveness on three interesting screens. The first is for "overlooked gems", which is essentially a "growth at a reasonable price" (GARP) screen with a quality overlay.

It returned nine ideas for the first quarter of 2017, including Air Partner, Character Group, Inspired Energy, Maintel, Pan African Resources, Renew, Revolution Bars, Van Elle Holdings and Watkin Jones.

Back-testing showed it underperformed in the fourth quarter of 2016 as "value" stocks remained out of favour.

However, a pure "momentum"-based screen outperformed the market by about 400 basis points in the final three months of last year. It included companies that have enjoyed earnings upgrades but where the share price had yet to follow suit.

Re-running the screen for the first quarter showed up 10 stocks: Britvic, Cape, Card Factory, Cineworld, Crest Nicholson, Marshalls, Premier Oil, Safestore, Tyman and Vectura.

And, finally, a screen which looked for "debt traps" - very high levels of debt and other liabilities coupled with negative EPS momentum - threw up nine ideas: Findel, Thomas Cook, Dignity, LoopUp, Mytrah Energy, Midwich Group, Tribal, Connect and KSK Power Ventur. A fourth-quarter back-test gave a total return of minus 10.4%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.