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In praise of models & humans.

16/9/2015

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I thought I would take another look at models as the BBC are doing a series of features and programmes this week about robots and the possibilities offered by artificial intelligence, including this piece titled: Intelligent Machines: The jobs robots will steal first.

Regular readers will know that I have been developing and running an on going experiment with my own Scores Model which so far has been performing well. So with that in mind I thought I would revisit the case for using models in investing as it has been proven in many different fields that models or algorithms can often outperform experts and even when the experts have access to the models the models tend to act as a ceiling to prediction performance rather than a floor.

Don't take my word for it as there was a great white paper a while ago from Wesley Gray the Author of one of my favourite recent investing books Quantitative Value. On his site Alpha Architect as well as great research like this they also offer some free screening tools too. In this paper he looked at much of the background to the case for systemic decision making, giving examples of experts versus models in section 4.

However don't despair because before that in section 2 he did see a place for experts in the research, development and assessment of models, just not in the implementation as shown in this graphic below from the paper.
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From: Are you trying too hard? By Wes Gray - click to read more.
With that in mind I have been assessing my own Scores model as it has been implemented in a mechanical way and I do have a tweak to it that I plan to introduce at the next quarterly review at the end of this month - so watch out for that and if I get around to writing it up in more detail. If you are not interested in my model or don't want to develop your own then I would also recommend Stockopedia and their Stock ranking system, if you are not familiar with it, as the humans there have done a great job in developing a successful model for identifying stocks which are good value, quality and have momentum. It is a subscription based service but you can read more about it and get a two week free trial by clicking the link above if that is of interest to you.

 Talking of models I note that there is also a ranking system for human models at a website called models.com where you can check out their rankings for models of the year 2014 and lots of other categories too if that is of any interest. Finally given the subject today I can't finish with out a bit of media to go with it. So on the visual front there was a good series recently on Channel 4 called Humans - which was about synths helping with domestic and other chores which was quite entertaining and worth catching up with if you missed it. While on the audio front this one seems appropriate. <END>

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Morrison's sales down and UBM shares in issue going up

6/11/2014

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Just a brief update today on the back of Morrison's (MRW) trading update and the announcement of UBM's rights issue which they had flagged up previously.

Taking Morrison's first the sales continue to decline but the rate seems to be slowing and the comparatives get easier in Q4. They say they are still in line with their plan announced earlier in the year and have tightened their forecast for this years pre tax profits to £335 to £365 million. So some reassurance there and Mr Market seems to have been pleasantly surprised (not as bad as feared presumably) as the shares have bounced today along with the rest of the sector. I see also that Netto's return to the UK via a JV with Sainsbury's has launched today and their offers of Prosecco at £5.50 and Lego at £3 seem somewhat eclectic. 

Looks like a relief / bear closing rally in the short term - not sure I'd be brave / clever enough to call the bottom of the food retail sector here ahead of the crucial Christmas trading period. Anecdotally I notice that we have been shopping more at Morrison's than Tesco's recently so their improved offering seems to be gaining some traction in our household at least.

Meanwhile UBM have announced a heavy 4 for 5 fully underwritten rights issue at 287 pence. All in line with their planned US acquisition although I do worry about that a bit given the record of UK companies going into the US and making a hash of it - think Tesco most recently and Sainsbury's before them to name just two. In the statement they also say that the dividend will be adjusted to take account of the extra shares being issued (around 44%) and they will target 2x cover going forward. So I reckon based on an ex-rights price calculated today this will mean it may end up on around a 3.6% yield with limited growth in short term while cover is built - so may be not that attractive at these levels, but might get more interesting if it falls heavily over the rights period, but probably no rush as you might also want to wait and see how thing pan out for them in the US first.
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Contrarian Opportunities in Conferences?

1/10/2014

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A couple of updates from stocks in the Media sector which could provide contrarian value opportunities. First we had an acquisition in the exhibitions sector from UBM. This takes them further into this area and makes them a larger player in the US. This is not a great surprise as they commented on the possibility of this a couple of weeks ago.

In brief they are paying £599 million for Advanstar and they have also announced that they will be having a rights issue in November to raise £563 million gross and they say the overall effect of this will be to reduce their debt to EBITDA. They also say the acquisition will be earnings accretive in 2015 and its ROI will exceed their WACC of 8.5% in the first full year post completion.

UBM has been having a transitional year and this acquisition should help to move them ahead next year. The share have been drifting lower as a result of the dull outlook this year and earnings downgrades as a result, they therefore have poor momentum and were oversold prior to this announcement. The rights issue is likely to weigh further on the price (which is down 4% this morning) and may therefore provide a decent medium term buying opportunity. I have found in the past that buying into stocks during a rights issues (if you like the prospects post the issue) can make for a good entry point. Prior to any changes on the back of this announcement the shares were trading on around 11x next years earnings with a near 5% yield.

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Meanwhile in the same space there was a trading update from the £400 million market cap. emerging markets exhibitions group ITE. This surprisingly suggested that their full year figures would come in ahead of current consensus after a strong Q4 and good cost control. I say surprising as this one has been under pressure due to its exposure to Russia and Ukraine. They said this had not hit a recent Russian food conference, but they did caution about the economic and currency effects going forward. The sell of has left the shares on less than 10x P/E with a yield of around 4.5%.

Obviously potentially a more risky situation than UBM which is now big in the US, but if and that's a big if the Russian / Ukraine situation can be resolved in the near future then it could be a good recovery play - so perhaps a buy for a brave contrarian investor or trader?

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