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Our winter portfolio returns 30% in just six months
By Lee Wild | Fri, 5th May 2017 - 14:17
Six months ago, and after success both in 2014 and 2015, we revealed our third pair of Interactive Investor Winter Portfolios. "If history is any indicator, these 10 stocks have the potential to outperform," we said. It was, and they did, in spectacular fashion.
However, despite our confidence in this seasonal strategy, we believed this could be a tough year for the portfolios. That's because this six-month trading period began just a week before the US presidential election, and ended a month after the UK triggered Article 50 and its eventual exit from the European Union.
An unprecedented rebound from the post Brexit vote low in June also threatened to curb enthusiasm for certain equities. The FTSE 100 and FTSE 350 benchmark index had already posted double-digit percentage gains versus pre-referendum levels, driven by a plunge in the value of the pound, and the rally looked exhausted.
But despite Donald Trump's shock election win and ongoing uncertainty around Brexit negotiations, we needn't have worried. The stocks chosen for our two winter portfolios are picked precisely because they have performed better than other shares consistently every winter for the past decade or more.
Our consistent basket of shares delivered an impressive 9.5% gain for the six months, with only one stock – the usually ultra-reliable Johnson Matthey (JMAT) – in negative territory. That's almost double the 4.9% a FTSE 350 tracker would have returned over the same period. Include dividends, and the consistent portfolio returned 10.25%.
But this year it was the five 'aggressive' stocks that shot the lights out, giving investors a 30% profit in just six months, and six times more than the benchmark index. With dividend income, it's more like 31.4%.
To identify these winners, we teamed up with Stock Market Almanac author and mathematician, Stephen Eckett, to exploit this beautifully simple, but hugely effective trading strategy.
All it requires is that investors buy the basket of shares on 1 November, or late-on in the previous trading session, and sell on 30 April. Buying and holding these portfolios only during the winter months has, historically, generated far better returns than if you had stayed invested all year round.
Trawling the past 10 years of data, we choose the five most regular outperformers for our so-called 'consistent' portfolio - each must have risen at least 90% of the time - and relax the entry requirements slightly for our 'aggressive' portfolio - stocks must still have a 70% success rate over the winter months - where average returns have been even greater.
Our latest top 10 was a perfect example of this seasonal anomaly, with research showing the majority have, on average, fallen over the summer for the past 10 years, before rising during the winter months.
Here's how our market-beating portfolios made it three out of three.
Aggressive Winter Portfolio
A decision to keep faith in two of last year's laggards was richly rewarded in the Interactive Investor Aggressive Winter Portfolio this time round.
Equipment rental giant Ashtead (AHT) and office workspace provider Regus struggled in 2015/16 as global stockmarkets made one of the worst starts to a calendar year on record. It was a mid-winter wobble from which these two failed to recover. However, they've returned to form this year, delivering investors phenomenal profits.
Trump's election victory lit a fuse under shares in Ashtead, which does most of its business in the US. If the president comes good on his promise to spend $1 trillion on fixing America's creaking infrastructure, Ashtead should make a fortune.
It took a change of name to kickstart Regus's recovery. From near a 19-month low, the shares have risen 36% since switching moniker to IWG plc (IWG) (International Workplace Group), ending our six-month strategy with a profit of over 30%.
An earnings upgrade cycle at JD Sports (JD.) is seemingly never-ending. It's been a star performer in our winter portfolios for two years now, and this year it was the best performer with a stunning 46.5% return.
With the UK business in great shape and getting better, the company is increasingly looking further afield. It already has a flourishing European operation, but "international expansion will remain a clear strategic focus," we're told.
Japan, Korea or India could be next, then the USA, reckons Peel Hunt's Jonathan Pritchard.
Taylor Wimpey (TW.) had a stunning six months, too. Among the worst affected by the EU referendum result, the housebuilder had plunged to prices not seen since 2014. But investor fears about a housing market slump have so far proved wide of the mark. Wimpey shares now trade roughly where they were before last summer's crash.
There's an oddball in every family, and the aggressive portfolio is no different. This year it was Playtech (PTEC), the gaming software firm that managed just a 3% gain this strategy.
It had already warned that sterling weakness versus the euro had hurt reported second-half revenue growth at the gaming division. Low market volatility had also impacted the financials business. But then Brickington Trading, owned by Playtech's co-founder Teddy Sagi, had sold 38.7 million shares at 850p, a big discount to the market price.
Consistent Winter Portfolio
Early November was a tough time for stockmarkets, but it was worse for our usually reliable basket of 'consistent' shares. And, while the portfolio did begin to track the wider market higher post-US election, it was always playing catch-up.
That was until the end of February, when a truly spectacular effort from one of our debutants sparked a dramatic reversal of fortunes. On the last day of the month, the supplier of heat treatment services to carmakers and plane manufacturers, jumped 11% following bullish final results.
"[With] trading momentum swinging upwards and the potential from additional corporate activity we see further value," said Numis Securities analysts. "Our estimates assume no acquisitions, so the risks to forecasts are on the upside," added Panmure Gordon.
And after that there was no looking back for this basket of shares. Bodycote (BOY) ended the six months up over 40%, guaranteeing a double-digit profit for the portfolio.
A second surge was triggered by cosmetics ingredients maker Croda International (CRDA) in the final weeks of the strategy, extending the portfolio's lead over the benchmark index. The Yorkshire-based blue-chip, which exports most of what it makes, said sales grew across the board during its first quarter and that margins at its core business were "strong and stable", meaning profit growth met expectations.
Elsewhere, Irish building materials giant CRH (CRH) ended higher, despite having surged by more than a third between the Brexit vote and end of October. It will surely be a beneficiary of Trump's infrastructure plans.
World-class cater Compass Group (CPG) eked out profits, too. It's a defensive name, but historically has done well during the winter months. Ahead of first-half results on 10 May, broker Barclays predicts a further re-rating, upgrading its price target by 10% to 1,700p.
Unfortunately, we have to mention Johnson Matthey, the only stock in either portfolio to end the six months lower than it began. The maker of catalytic convertors had risen in each of the past 10 winters, rising an average 13.7%, but this time ended 12.6% lower.
This was another share that had rocketed on sterling's slump, rallying around 27% from Brexit vote to mid-October. And it confirmed our fears ahead of the winter strategy that some of these big exporters might run out of puff either before or during the six-months.
Even a new corporate structure failed to revive interest. A rapidly declining light duty diesel market – about 16-18% of group operating profit - is a concern, as is potential technology disruption.
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.
|JD SPORTS FASHION||347.00p||0.87%|
|All data 15min delayed as of: 20:01:07 19/11/17|