Ten growth stocks at a reasonable price
Posted on July 10, 2008 by Richard Beddard
Filed Under Companies, Investing |
I promised myself I wouldn’t use this quote until I reviewed The Complete Turtle Trader, the book it’s from, next week. However, it’s the perfect introduction for today’s blog and I cannot resist.
Good traders apply every ounce of intelligence they have into the creation of their systems, but then they’re dumbbells in following them. You’ve got to have a schizoid approach. Work like hell to make it good, and then ignore it like you’re a brick wall. *1
This is surely true of John Mulligan an investment banker who spent 4,000 hours developing his Share Tracking And Ranking system (STAR), which he uses to manage his own portfolio and compiles into a monthly newsletter. July’s issue was number 187 (so it’s been going fifteen and a half years) and he’s backtested the system to 1985.
According to John’s performance table, £1,000 invested in the FTSE All-Share in 1985 would be worth about £4,000 today. £1,000 invested according to STAR would be worth over £40,000.
Although Dennis’ ‘turtle’ trading and STAR are very different, they work for the same reason. A mechanical system applied remorselessly takes the emotion out of investing. I’ll talk Turtle next week, but STAR protects the hapless investor from overpaying for glamour stocks, and selling-out in dismay at the worst possible moment - when prices have already fallen. It helps you buy low and sell high when you might naturally do the opposite.
If you sign up to STAR you sign away free will and whim, and obey an algorithm.
John calculates growth, income and speculative rankings, but growth is simplest, and has the longest record. Although more goes on behind the scenes, essentially John takes the largest 300 companies, extracts the 75 with the lowest price earnings ratios and ranks them by their two-year earnings growth forecasts, the higher the better. He then constructs and manages portfolios according to the rankings*2.
Investors are rightly sceptical about forecasts. Analysts often seem to be react rather than predict, only revising their figures after the market has adjusted and, John suspects, the quality of analysis might be falling as hedge funds poach the best analysts. Nevertheless, using forecasts has improved returns from STAR so far. The forecasts mean profits are, at least, expected to grow and by insisting on a low PE ratio John’s trying to avoid paying too much for shares.
Since I prefer smaller companies that don’t get much attention from the City, it’s interesting that you can profit from big, widely followed companies too. I’m hoping STAR might give me some ideas for iBall. Here are the selections for July, with my annotations. Perhaps they’ll give you some ideas too:
- Eurasian Natural Resources (ENRC)
One of Kazakhstan’s finest, seriously. It’s a mining, power and transport company that listed in December. - Legal & General (LGEN)
Insurance, savings, investment management. It’s been with us forever and yields 6.5%. - Woolworth (WLW)
Pic ‘n mix retailer has just ejected its energetic ceo after he failed to bring it into the 21st century. - Prudential (PRU)
Second life insurer in the list, marginally more exciting than the first because of its Asian interests. - Findel (FDL)
Mail order and doorstep retailer. It’s catalogues include Letterbox, I Want One of Those and Kleeneze. It’s also the nation’s leading educational materials supplier. - Venture Production (VPC)
North Sea oil company increasing production from our dwindling reserves. - Meggitt (MGGT)
Engineers bits for planes, combat systems and sensors - Aga Rangemaster (AGA)
Is to cookers what Range Rovers are to cars. . - Daily Mail and General Trust (DMGT)
More than just a newspaper group, it sells specialist business information too. - Yell Group (YELL)
Investors are yelling alright, as directors take big bonuses while the Internet eats its business.
These are the shares you’d buy if you were starting a STAR portfolio. You wouldn’t, of course, do that unless you had subscribed for the monthly updates with sell and buy instructions. But I think there will be good ideas in this list for stock-pickers. Mechanical purists wouldn’t approve us picking and choosing because it lets emotion back into the process, but we’re not all ready to surrender to a system just yet.
Footnotes:
- His next sentence was: “President Bush would be a great trader if he had a system”
- For a more detailed explanation of STAR, see A simple system that trounces the FTSE
- John Mulligan on iBall.
Comments
5 Responses to “Ten growth stocks at a reasonable price”
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I still don’t trust the markets Richard. The Fannie, Freddie and Lehman crashes this week are the first things I’ve seen that make me think we’ve moved from the first to the second inning.
I am as bearish as to suggest we are still very early in the de-leveraging process.
Hi Deborah. Nice to hear from you again. I don’t trust the markets either, but I’m also sceptical of our ability to call them! Hence the bottom-up quest for good businesses at cheap prices. There ought to be increasing numbers of them, if the market’s in decline.
Just read a book on the Turtle Traders and it provided some interesting insights into a mechanical trading strategy.
In my view, far too many people trade based on emotions and variable decision making processes and that’s why so many people don’t earn as much as they could.
The Turtle approach is good because it sets rule and perform well when those rules are applied without deviation.
I’ve applied a Turtle-style approach to my trading and am up 22% since February, even while being cautious in this current market.
Long Live the Turtle!!!
Karl
Hi Karl, thanks for the observation. I’ll be writing my review today. I’m not a trader but I think the general point you make about emotion and discipline is true, and it’s one of the virtues of the book.
I would prefer to wait till at least September to purchase equity
certain Bonds are a good investment at the moment