Semi Year SNAPS 2021 - as long as the music plays, we dance

What a six months it’s been for the NAPS Portfolio – the “bold bets on Big Mo“ that I described at the start of the year have paid off. I’ll go into the performance in detail shortly, but the portfolio has rocketed by 160% since the Covid crisis lows and has managed a 68% return in the last 12 months alone.

A NAPS recap…

For new readers – the “no admin portfolio system” has been running since the beginning of 2015. It’s a very simple, systematic process that selects the top ranked shares in each sector into a 20-stock portfolio. I run the process once per year at the start of the year, and then rebalance a year later. The “SNAPS” are the same process but run at the half-year mark.

For the first five years I used our marquee StockRank as the core ranking at the heart of the portfolio and selected 2 stocks from each of our 10 sectors. Eventually I reduced the shares held in the Utilities and Telecoms sector to one each – as frankly they tend to be small sectors with large, defensive, regulated stocks that don’t hold out much hope of strong capital returns.

After five years I switched to using a “half and half” portfolio that more aligned with my market interest areas. Half the portfolio now uses the “VM Rank” (value and momentum) while the other half uses the “QM Rank” (quality and momentum). I explained the current process in depth at the start of this year – but in essence it still allocates fairly equally across the 10 sectors. I believe this change in process has added considerably to the 75% investment return the portfolio has generated in the last 18 months.

If you want to read the full history of the NAPS you can find the archive of blog posts here and some webinars about the process on our Youtube Channel.

Portfolio Performance

The performance tracking has been made much easier by the release of the great new portfolio performance tools on the site – if you aren’t yet using the portfolio tracker now is the time to start. Accurate time-weighted returns are now calculated without any effort.

31% performance year to date, which compares favourably against the FTSE All Share which is up only 7.8%, and the FTSE AIM All Share which is up 8.2%. Only 1 unit trust out of 242 in the IA UK All Companies Sector according to Trustnet has beaten the NAPS year to date. And only by a whisker. It’s a 99th percentile performance.

A 233% performance since inception. This compares extremely favourably against the FTSE All Share which is up a paltry 14.5% in the same timeframe, and the FTSE AIM All Share which is up 78%. The IA All Companies Sector only goes back 5 years on Trustnet. The NAPS is 3rd out of 242 in that timeframe…

The return since inception is 20.2% annualised (excluding dividends). This is quite a remarkable result considering the NAPS Portfolio takes barely an hour per year to put together. There’s really no need for swish City fund managers, expense accounts or Range Rovers for good performance in the stock market – this simple recipe of factor exposure and diversification proves it.

Position Performance

In terms of individual names… the biggest winner year to date has been Reach (LON:RCH) – up more than 90% – followed closely by Up Global Sourcing Holdings (LON:UPGS) and Sdi (LON:SDI) . 16 of the 20 stocks have beaten the FTSE AIM All Share’s return YTD.

Only Oil Services firm John Wood Group has fallen dramatically -30%. It’s actually been a pretty good 6 months for recovering oil amp; gas Eamp;P firms but the oil services sector has continued to perform poorly.

Benchmarking the Results

You may note tha there’s been a remarkable “win rate” for the NAPS portfolio year to date. 17 of the 20 positions (85%) are ‘winners’, with only 3 ‘losers’. Now this might seem like an extraordinary result – but is it really? To be totally honest, it’s been a great year for most of the market.

I’ve analysed all the tradable stocks in the market above a market cap of £10m. 73% of stocks above a market cap of £10m have been ‘winners’. Narrowing this down to those that were in the 90-100 StockRank bucket at the start of the year – 82% of those have been ‘winners’ with a price return greater than zero.

In terms of the performance of the StockRanks, it’s been a strong year. The average 90+ ranked stock has returned 26% year to date. So the NAPS have performed well, but not anomalously well. I always think that benchmarking your own performance against high StockRank stocks, rather than the FTSE indices, is a great thing to do. It’s really the real opportunity cost comparison for Stockopedia subscribers.

What’s particularly fascinating about the chart above is the extraordinary returns of the low StockRank decile. Zero to 10 ranked stocks have had a great run since the bottom of the market, and that’s continued this year. Interestingly the average return is very high, but the median return is not so great. That’s because the returns of that bucket are concentrated in just a handful of names. Do note that over the long run low StockRank shares have tended to disappoint. We may be in a more disruptive economy, and high Ramp;D shares are benefiting… but I personally like to play the averages.

Sector diversification

Themes in the sector performance year to date have been clear. Consumer stocks have continued to rally. Obvious “stay/work/play at home” plays like Naked Wines, Focusrite and Halfords have shown continued strength, while healthcare stocks (SDI, ERGO) have continued last year’s outperformance through H1 2021.

Remember – the NAPS portfolio is all about sector agnosticism. I’ve joked in the past that it’s the Noah’s Ark of investing – selecting shares 2 by 2 from each sector to weather different market environments. In some years we see completely different sector leaders than others. The point is not to predict which sectors will do well, but to place one’s bets in such a way that you can always benefit in some way from sector rotation without a crystal ball.

Of course in the covid crisis last year the portfolio got hammered to lows like every other equity portfolio. The truth is in a market crisis, all equity portfolios are at risk and sector diversification won’t necessarily protect you. The real benefit of having a sector diversified portfolio is you have far higher odds of participating in outstanding sector performance to the upside. FOMO is minimised.

The biggest mistake that private investors make is having all their eggs in a single sector basket. I’ve seen countless investors with massive overweights to pro-cyclical sectors that are projected to “continue outperforming forever”. Think “Peak Oil” or “Dotcom bubble”. What happens next? Years and years of underperformance. It’s always worth looking at your overweights and considering where you might be being overconfident.

A highly unusual market – speculative shares have outperformed

The other key factor to note is that the last 12 months have seen Speculative and Highly Speculative RiskRating shares outperform dramatically. That can be seen confirmed in the performance of low 0-10 ranked shares above. There should be no doubt at all – this is an anomaly and not a normal market cycle. Over the longer term, lower RiskRating shares tend to perform better on a risk-adjusted basis. If you want to understand this concept and why the Tortoise beats the Hare – please do read our RiskRatings ebook.

The RiskRatings are published at the top of all StockReports. They provide an extremely simple way to understand the relative volatility of each stock you are investing in. As a refresher each RiskRating defines a standard volatility band expectation for each share (see below). i.e. if you own a “Speculative” share, you can expect a share price volatility of between 45% to 70% in any standard year.

Why have highly speculative shares doing so well? Well there’s has been a huge amount of economic disruption, and that’s seen a wave of money (including govt handouts) thrown at pre-revenue companies across a wave of industries. Blue-sky biotech and green-tech/energy stocks have done amazingly well, and the resurgence of inflation fears has raised valuations in the recently out of favour mining explorers. Now we may well be in a new investing era – but it pays in investing to be prudent with one’s speculations. History is littered with broke individuals who took on way too much risk at the top of market cycles.

Saying that, the NAPS itself has benefited greatly from its exposure to Speculative shares. The lower volatility Balanced/Adventurous shares have not been the key drivers of return. This is a double edged sword of course. In a downturn the portfolio may be more subject to drawdowns, but avoiding the most “highly speculative” RiskRatings does reduce the worst case scenarios.

I do not like to bring out a crystal ball so won’t predict the future. What I do know is that markets tend to mean revert, and after a year of such extraordinary gains one must expect there to be a worrisome wobble at some point. I’ve seen all kinds of statistics on the US markets about new highs with very low breadth i.e. market returns are concentrating in fewer and fewer names. This kind of technical market weakness can make you worry, but the UK market shows continued momentum and has reasonable valuations against other international markets. So as they say “while the music plays we dance”….

The SNAPS Selections

Using the same selection process as in January 2021 we come to the following portfolio – half VM and half QM. To be clear, the publishing of this portfolio does it imply that the NAPS is a 6-monthly rebalanced portfolio. The main NAPS portfolio is an annually rebalanced portfolio. This set of stocks is the new “opportunity set” that the same principles imply. There are some individuals that use the NAPS principles in different ways – some use stop losses, some rebalance more frequently or less frequently, some use different ranks and sector allocations. The point is that this is an illustration, not a recommendation and should be considered as such. One’s personal circumstances are very individual and there’s no investment advice here – just education and illustration – so DYOR, seek advice if you are unsure and best of luck in these wild markets!

Many thanks to Jack Brumby and Ben Hobson for the individual stock write ups below. They have great insight!

Consumer Cyclicals

Marshall Motor Holdings (LON:MMH)
Marshall Motor Holdings is the 7th largest motor dealer group in the UK, with 115 franchise dealerships representing 22 brand partners across the country. It has a great track record of steady like-for-like revenue growth over time and a solid expansion strategy of organic growth and selective acquisitions in a fragmented market.

In its recent pre-close update, the group noted: “The market has continued to benefit from positive tailwinds, including a recent unprecedented used vehicle value appreciation and favourable demand-to-supply conditions for both new and used vehicles… The Group expects to report an exceptionally strong first half performance in both profit and cash generation when it issues its interim results on 10 August 2021.”

Halfords (LON:HFD)
Halfords is the UK’s leading retailer of motoring, cycling, and leisure products and services, while its Autocentres division provides vehicle servicing, maintenance, and repairs. Its share price performance since March 2021 has been exceptional, with a one-year relative strength measure of some +139%.

In the group’s preliminary results, Halfords said: “Demand for our services remains strong in the new financial year, and our touring categories are currently performing particularly well given the trend towards staycations this summer. In the longer-term, we remain confident in the future prospects for the UK’s motoring and cycling markets and our ability to compete strongly in both.”

Financials

Investec (LON:INVP)
Banking and asset management group Investec, saw its earnings slide in 2020 and 2021 largely as a result of Covid. However, the second half of 2021 did see the start of a recovery, with earnings strengthening. EPS forecasts have stabilised and there is positive momentum in the share price. It looks relatively cheap on standard valuation metrics and forecasts currently predict a continuing recovery in the bank’s forunes.

In its full year results, Investec said: “The second half showed strong earnings recovery, supported by our resilient client base, a rebound in economic activity and a greater sense of optimism spurred on by global vaccination campaigns. We carry this momentum into the 2022 financial year.”

Record (LON:REC)
Record Currency Management is currently the highest Quality-Momentum stock on the UK market. As the name suggests, this is a leading currency management firm, with assets under management for pension funds, foundations and other institutional clients worldwide. It has a history of innovation in its field and continues to bring new products to market.

In its recent business update, the group commented: “Looking forward, we start the year on our highest ever level of AUME (assets under management equivalent), which is more diversified across our higher-margin products and provides us with an excellent platform for growth in FY-22. Added to this, we have been developing new products in collaboration with our clients.”

Belvoir (LON:BLV)
Franchised property groups appear to be a fantastic business model, and Belvoir is one of the largest in the market. Its franchises include Belvoir, Newton Fallowell, Northwood, and Lovelle. It also has a Financial Services division called Brook, which manages a network of 202 mortgage and financial service advisers operating through 100 businesses. Despite a stellar share price run (beating the market by 74.4% over the past year), Belvoir still pays out a forecast 3.12% dividend with plenty of potential for steady long term growth.

The group said in its recent AGM update: “The Board is pleased to report that trading during the four months to 30 April 2021 was exceptionally strong and materially ahead of management’s expectations, with substantial revenue growth across all three markets.”

Industrials

Gattaca (LON:GATC)
Gattaca focuses on recruitment in the engineering and technology sectors, with 75% of its business coming from more dependable long term agreements. The stock fell far during the pandemic and has since rerated aggressively as society cautiously reopens, with a one-year relative strength measure of some +374% and a VM Rank of 99.

In its recent trading update, the recruiter commented: “Since we announced our half year results we have seen a faster rate of recovery in NFI than originally expected… our current expectation is that this rate of recovery will continue, and we therefore expect our underlying continuing profit before tax for the year to 31 July 2021 will be significantly ahead of market expectations.”

IMI (LON:IMI)
IMI is an engineering group that specialises in systems that control the precise movement of fluids. Both its earnings and share price have been largely unaffected by Covid, and in fact the group has been building momentum. It has a solid growth profile and strong financial quality characteristics. The shares are relatively expensive but IMI’s quality and momentum are exceptional.

In a recent update, the company said: “This momentum not only gives us the confidence to raise our guidance for the full year and announce a share buy-back programme, but also underpins our belief that IMI can deliver sustainably higher margins going forwards, at the same time as investing fully for growth.”

Royal Mail (LON:RMG)
When it comes to shares that are Covid ‘winners’, Royal Mail is right up there. After two years of negative momentum, 2020 saw the postal group’s share price take off as delivery services became crucial to a society in lockdown. It was enough to get the group back into the FTSE 100, with profits doubling and new delivery services launched. The focus is on maintaining that momentum, but for now it is solidly ranked across all dimensions.

In its full year result, the company said: “The Group has demonstrated that it can effectively harness market growth opportunities even in difficult circumstances and revenues previously forecast for three years’ time have been delivered this year. However there is still much to do.”

Consumer Defensives

Bakkavor (LON:BAKK)
Bakkavor makes ready meals, desserts, pizza, bread and salads for grocery chains across the UK – and also has operations in the US and China. It was hit hard by Covid and Brexit but sales are recovering and it’s emerging as a leaner, meaner business. It looks reasonably priced and momentum is strong. Profitability is intact and the suspended dividend looks set to return. In a recent update, the company said: “The financial position of the group is robust and has strengthened over the last year.”

Zambeef Products (LON:ZAM)
Zambeef is an integrated food manufacturer, distributor and retailer in Zambia, dealing in a range of produce from beef and chicken to stock feed and flour. It floated on AIM in 2011. Covid hit the business hard but sales have been improving, which is feeding through to strong price momentum. Exchange rates and uncertain local economics are a risk – and the stock looks cheap on several measures as a result. In a recent update, the company said: “The Group had a strong start to the financial year, delivering results ahead of pre-pandemic levels.”

Energy

Wentworth Resources (LON:WEN)
Wentworth Resources is a small-cap energy company with gas production and exploration assets in the Rovuma Basin of East Africa, including a joint venture onshore producing gas field in Mnazi Bay in Tanzania. Strong local demand has pushed up production this year – driving momentum in the share price. Its exotic nature means the stock looks cheap, but this is a well financed, cash producing business.

In a recent update, the company said: “Building on from the successes of last year despite the challenging macroeconomic environment, the first half of 2021 has demonstrated the ongoing resilience and the strength of the fundamentals of our business.

Seplat Energy (LON:SEPL)
Seplat is a Nigeria-based mid-cap energy company working in oil and gas exploration and production. Current guidance suggests it will produce in the region of 48-55 thousand barrels of oil equivalent per day for the full year. Covid caused huge disruption to energy demand last year, which triggered losses for Seplat in 2020, but it looks set to bounce back to profitability in the year ahead. The stock looks cheap and price momentum has been positive over the past year.

In a Q1 update earlier this year, the company said: “We remain confident that our ongoing cost-cutting initiatives and prudent management of cash will enable further reductions in debt, whilst supporting dividend payments and investment for growth.”

Telecoms

Airtel Africa (LON:AAF)
Airtel Africa is a leading operator of affordable and innovative mobile service in 14 fast-growing African countries, with an exciting mobile money business. Targeting huge markets, Airtel has assembled 13 consecutive quarters of double digit revenue growth and EBITDA margin expansion and still finds room to pay out a 5.26% forecast dividend.

In the group’s recent full year results, the group commented: “The combination of bringing connectivity to underpenetrated mobile markets and improving financial inclusion through banking the unbanked, across our territories of operation, together provide us with a sizeable runway of sustainable profitable growth potential, and one we remain very confident of delivering.”

Basic Materials

Steppe Cement (LON:STCM)
Steppe Cement is the Malaysian-incorporated holding company of the two operating companies, (Karcement and Central Asia Cement) that form the cement manufacturing complex at Karaganda in central Kazakhstan. It’s an unusual UK listing that generates some eye-catching numbers, including a forecast dividend yield of nearly 12% and a forecast PEG of 0.5. It also qualifies for Jim Slater’s ZULU Principle screen. In the group’s recent full year results management observed that “the market demand in 2021 seems strong despite the effects of Covid-19 temporary lock downs.”

Ferrexpo (LON:FXPO)
Ferrexpo has been producing iron ore pellets from its mining operations in Ukraine for over 40 years and its asset base contains the largest iron ore deposits in Europe with approximately 1.7 billion tonnes of resources. But it’s not just the lifespan of its resources that impresses – the group transforms its raw materials into the highest grade iron ore pellets in the world and is currently reaping the benefits of this. For the past year, Ferrexpo has consistently been one of the highest ranking stocks in the UK market.

In its full year results, the group commented: “Through consistent investment and capital management, the Group has once again been able to deliver strong financial performance, coupled with shareholder returns.”

Technology

Eleco (LON:ELCO)
Eleco specialises in software and services for the architectural, engineering, construction and owner/operator (AECO) industries and interior furnishing industries. It has a very impressive growth track record and there are some eye-catching qualities in terms of strong and improving margins and return on capital. It looks relatively expensive but the momentum is strong and, unusually, it doesn’t seem to have been impacted very much by the turbulence of the past 18 months.

In a recent trading update, the company said: “The market opportunity for Eleco is compelling and our new, focussed growth strategy will allow us to better capitalise on the significant opportunities available to the Group.”

Focusrite (LON:TUNE)
Focusrite is a global audio products group of companies, with well-regarded brand names including Focusrite, Novation, ADAM Audio, and Ampify. This is a perennial High Flyer that regularly features at the top of the QM charts due to its consistently high profitability levels coupled with steady top line growth. Focusrite continues to surprise the market, and brokers have repeatedly upped their earnings forecasts through the year.

In its half year results, the group said: “Overall, the Group has performed exceptionally well. Revenue, EBITDA and cash have all grown considerably: Net Promoter Scores (‘NPS’), an important performance indicator, have remained strong at 73 (HY20: 72); gross margin has increased; new product introductions have performed well; and demand for many of the Group’s products has remained at unprecedented levels.”

Healthcare

CVS (LON:CVSG)
Buy-and-build veterinary services group CVS, has been on an incredible run in recent years – and its performance since the Covid-induced market collapse in 2020 has been staggering. It now operates across veterinary practices, diagnostics, pet crematoria and an online pharmacy and retail. Profitability is accelerating and the business is flush with cash. It has always ranked as an expensive looking share but the quality and momentum are undeniable.

In a recent trading update, the company said: “…the Board is increasingly confident that this strong performance will continue for the remaining months of this financial year. Consequently, the Group now expects full year revenue to be ahead of current management expectations and adjusted EBITDA to be comfortably ahead.”

Integrated Diagnostic Holdings (LON:IDHC)
IDH is a leading consumer healthcare company in the Middle East and Africa with operations in Egypt, Jordan, Sudan, and Nigeria. The company has internationally-recognised accreditations for its portfolio of over 2,000 diagnostics tests. Although the territories in which it operates might present risks, its financials are uniformly excellent, with double-digit compound annual growth rates and profitability metrics over multiple years.

In the group’s recent first quarter results, IDH said: “While the Company’s immediate focus remains on continuing to play a frontline role in helping governments across our footprint combat the ongoing Covid-19 pandemic, IDH’s longer-term outlook remains strong as evidenced by the recovery of our conventional business witnessed in the first quarter of 2021.”

Utilities

Centrica (LON:CNA)
British Gas owner Centrica had a terrible year in 2020. Unseasonably warm weather, Covid and low energy prices contributed to significant losses. The dividend was scrapped and it remains uncertain when payouts will resume, which is unfortunate given that yield is usually one of the appealing features of utilities stocks. However, a turnaround is underway and proceeds from a divestment have given the group more financial firepower. Momentum is positive and the stock looks cheap, so all eyes are on that trend continuing.

In a recent trading update, the company said: “Although the external environment remains uncertain, our tight focus on cash and on fixing the basics across the Group leaves us well placed as we continue the turnaround of our company.”**

Stockopedia