Of all the stock pick strategies out there, this has got to be one of the easiest to follow. I don't buy into the rebalancing part of it, and have my own views, but the selection criteria make a lot of sense. My june watchlist of the top 10 MF candidates, shows EOH, EXX, KIO, PNC, MTA all in excess of 20% growth, with Vod having been there but pulled back again. Only one MF candidate for June has taken a hit - Raubex of 12%. A couple are sitting in 3 or 4% loss, which is neither here nor there, so all in all, this strategy has a lot of common sense in it - take the best performing and cheapest stocks out there and buy them. So simple, so elegant. Of course, you need to exercise a bit of thought in the timing. My current strategy - is wait for the ALSI pullback - look for the MF candidates showing relative strength, and start buying selectively. Also, watch out for any stocks that make the list out of the blue for no explainable reason - like RLO, who suddenly have a massive jump in ROCE.
Current MF top ten - Palcap, WBHO, Kumba (already own), Pinnacle (just doggedly stays in the top 10, despite its fantastic run), Reunert (fishy!), SSK (don't get caught overweight in construction),Metair (currently own), KG Media (my top pick - what margins!!) and Santam.
Companies that offer good dividends stem their capital expansion and bloat these returns. Often they are mature and ex growth. One also sees this at cyclical peeks as companies eek out more GP on high turnovers. Once again mature companies. So this can be a bit of a minefield. Great for swing trading momentum stocks I would imagine, though.
What about finding companies with hidden potential - ie. the returns are kept low by investment in R&D or software etc. which is written-off so rapidly that no meaningful asset ever appears on the balance sheet (other than the deferred tax differences - which can also be an indicator.) Or sudden fixed asset write downs. When combined with insder buying of a closely held company - this should prove interesting.
Ja, that is the whole point about the magic formula strategy, cycling in and out of stocks within the same year. But MF is structured around US tax laws, and I have not been able to find a similar motivation on SA stocks - so I am letting my holdings run, as long as the 200 MA keeps pointing up, or fundamentals still support.
But the hidden potential company search you are talking about, is not as easy - you will not be able to automatically scan for such measures - so unless you have some sort of investment club (I would be keen BTW), you will miss a large number of these.
The problem with "sharing" these stocks is that they are often so tightly held that you tend to guard them jealously (until you have built your position,that is.) I think I have bought 50% of all rto shares traded in the last two years. Makes you think about all of those sizzling hot tips that are always on offer. Happy to look at an investment club thingy. Just need to agree to share email addresses.
MF is a simple system that ranks the highest ROCE companies with the lowest PE's. So you put a filter to search all companies with PE's & ROCE greater than 0 (ROA is probably better, to get rid of financing tricks). Then you sort from lowest PE to highest PE - and rank from 1 - whatever. Then you sort again for highst to lowest ROCE - and rank a second time from 1 - xxx. Then you add the two ranks, and sort from lowest to highest. The top 10 are your MF candidates - highly profitable companies trading at the lowest PE's.
I use that sort of a system on the share filter here, with about 20 for a ROCE score and PE less than 11 - but add in DY as a variable and sometimes Cap for a bit of stability or Price as a % of NAV for relative value. But have never paired one variable off against another. Will have a look see.
Ja, you do need to chuck in a market cap measure in there - R1bn or more should do it, volume traded could also work - small and micro caps will skew for sure. I do look at performance over the last 3 to 5 years as well - I don't want any stocks that have not been able to consistently demonstrate high margins - so RLO, for example, is suspect.
RLO had an exceptional profit of R346M and an effective tax rate of 20%. So the ROCE has not been normalised. Standard bank offers raw data. The user needs to "smooth" the data before applying a filter.