Diary of a Private Investor

Risk, Style and Special Situations

Regular readers will be aware that over the past couple of years, the focus of this site has moved away from individual stock commentary, towards a greater emphasis on portfolio management. In short, I am trying to build and manage a resilient portfolio that provides adequate risk management while delivering an annual absolute return in excess of 10% per annum but without this becoming a quasi-tracker – i.e. I want to consistently outperform the market (I benchmark against the FTSE All Share index).

In building my portfolio, the tools provided by the subscription site, Stockopedia have been invaluable; for stock screening, as a sanity check against my own research, helping me to enter the world of income investing, helping to identify red flags etc. This said, the main tools provided by Stockopedia have been largely stock specific rather than true portfolio management tools – until now that is! Yesterday saw the launch of Stockopedia’s new Risk Ratings (based on volatility) and Stock Rank Styles. Both seem to be excellent enhancements to what I believe is already a superb site for private investors.

Risk Ratings
Using the broader definition of risk (i.e. upside and downside risk), this tool taps into share price volatility over a three year period. Lower volatility shares are deemed to have lower risk than higher volatility shares, although a balanced portfolio should have a mix of risk. From low risk to high risk, the classifications are Conservative, Balanced, Adventurous, Speculative and Highly Speculative. Of the 30 individual shares that I currently own, here’s how they are currently rated:

Conservative (4) – Henderson Far East Income (HFEL), Impax Asset Management (IPX), Microgen (MCGN) and Phoenix Group (PHNX)

Balanced (7) – Bioventix (BVXP), GVC Holdings (GVC), Ideagen (IDEA), Lloyds Banking (LLOY), PayPoint (PAY), Safecharge International (SCH) and System1 (SYS1)

Adventurous (9) – Amino Technologies (AMO), Central Asia Metals (CAML), Golden Prospect Metals (GPM), IG Group (IGG), Liontrust Asset Management (LIO), Severfield (SFR), Somero Enterprises (SOM), Watkins Jones (WJG) and Zytronic (ZYT)

Speculative (7) – Beximco Pharmaceuticals (BXP), Centamin (CEY), D4T4 Solutions (D4T4), Diversified Gas and Oil (DGOC), IQE (IQE), Petards (PEG) and Stadium (SDM)

Highly Speculative (3) – Anglo Asian Mining (AAZ), Hurricane Energy (HUR) and Iofina (IOF)

The main takeaway for me is that a resilient, balanced portfolio needs to have mix of risk, weighted according to the phase of the market (i.e. “risk on” or “risk off”). Specifically, I need to increase my exposure to Conservative stocks. Reassuringly, three new income shares that I have on my buy list are all currently rated as Conservative. Personally, I don’t have a huge appetite these days for Highly Speculative stocks and don’t really want any more than 1 or 2 holdings with this rating.

Stock Rank Style
The second enhancement launched by Stockopedia this week relates to the combination of Stock Rank metrics (i.e. the mix of Quality, Value and Momentum). There are 9 styles in total, although only 7 of these styles currently feature in my portfolio. Exchange Traded Funds (ETFs) are not classified by style, so here is the breakdown of the 28 shares that do have a classification:

Contrarian (1) – IGG

High Flyer (11) – AMO, LIO, SOM, WJG, BVXP, IDEA, SYS1, IPX, MCGN, D4T4 and PEG

Momentum Trap (1) – HUR

Neutral (9) – GVC, LLOY, PAY, SCH, IOF, BXP, DGOC, IQE and SDM

Super Stock (4) – CAML, SFR, ZYT, CEY

Value Trap (1) – AAZ

Firstly, I was delighted to see that I have largely avoided the “traps” and that both AAZ and HUR are holdings I regard as Special Situations. It was also of no surprise to me that around a third of my holdings were in the High Flyer classification as this is a High Quality/High Momentum style and as I have explained in previous articles, QM is my preferred strategy for core holdings – although I do think one has to be careful about weightings in this category when the market turns bearish because by definition, this category is pretty expensive. The “Neutral” category is a frustration because it might include some shares that are close to becoming traps or some that are moving the other way. So, the second major takeaway for me is to monitor the changes in classification on a regular basis.

So far, I am finding both the Risk Ratings and Stock Rank Styles to be incredibly interesting. My sense is that these will become increasingly valuable portfolio management tools over time. But first, I have to master my own understanding and then monitor the progress of my holdings and potential holdings through both lenses. I will likely be including this new language in some of my posts on this site, so for readers who are not Stockopedia subscribers, I hope it does not become too tedious.

Special Situations
Seeing as I am publishing an article this week, I’ll take the opportunity to mention two of my Special Situation holdings:

Hurricane Energy (HUR) – Shareholders continue to wait for the promised Competent Persons Report (CPR) and/or a farm-in partner and/or debt/equity fund raising and/or a takeover of their oil field licenses in the North Sea that could contain over a billion barrels of recoverable oil. Yesterday saw the HUR share price rise around 12% with over 12 million shares being traded. Something could be brewing me thinks.

IQE (IQE) – For a while now there has been speculation that IQE’s VCSEL technology could be used in the next generation of smartphones being launched this year, especially the iPhone8. This technology is likely to be used for 3D sensing, possibly in relation to augmented reality functionality. This is not something that IQE will ever be able to specifically announce due to non-disclosure agreements (NDAs) but if this speculation is accurate, it will lead to a massive jump in IQE’s earnings in H2 this year and forward into 2018 and beyond – in short, it would be transformational. Perhaps the biggest clue yet was in Lumentum’s earnings call yesterday, a summary of which can be read on Seeking Alpha (registration required) – wit thanks to “sweenoid” on ADVFN. A little patience is required but the smoke signals are getting stronger for IQE.

Happy investing folks!
Simon (Let’s chat on Twitter – @BrilliantLeader)

 

Disclosure – At the time of writing, I own all 30 shares mentioned in this article. My current holdings page was updated on 28 April and no changes have been made since then.

 

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