2023: A Year in Value

13th Dec '23 by Mark Simpson

8 comments 2017 reads

When I looked at the performance of Value at the end of 2022, it was a rather depressing picture:

While it was clear that expensive stocks were not the place to be, the top decile of the Value Rank underperformed the FTSE All Share. Indeed, all of the deciles underperformed. It may seem strange: how can a series of portfolios that contain the whole market not match the index performance, on average? The reason for this mismatch is the difference between the market cap weighting of the index and the equal weight of the Value Rank deciles. An equal-weight portfolio has greater relative exposure to the performance of small cap shares. In 2022, the performance of large caps held up the value of the indices while the median stock underperformed.

2023 Value Performance

One of my Value Themes for 2023 was that small and mid-caps were due to play catchup. Fast forward a year, and we have some good news:

The cheapest Value Rank decile outperformed with a +5% return versus a broadly flat index. We still see most of the deciles underperforming, led by the woeful performance of the most expensive stocks. So the large cap bias has remained, although to a lesser extent. This is confirmed when I look at the performance of the Quality Rank. Here, all deciles remain below the performance of the FTSE All Share in 2023:

This suggests that the rotation away from large caps still has a way to go. Anecdotally, many small caps look simply too cheap, and I created a screen a few months ago that aimed to identify these small cap value opportunities.

A year of speculation?

My second Value Theme for 2023 was that it would be a stock-pickers market. To test this assertion, I decided to look at what the best-performing stocks have been so far in 2023. Using the Stockopedia Screening Tools, I picked the top 3% of UK stocks on absolute price change that were currently greater than a £10m market cap. These are the 40 best-performing stocks of the last year:

The first surprise is how little return is required to make the top 3%. Only 32 companies more than…

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Callum Cowan1

13th Dec '23

Thanks for the article Mark

Although your posts don't gather the feedback like the scvr, I'd like to add that as I find them all informative and really helpful in improving my investing knowledge then I'm sure other subscribers at a similar stage must share my view

Please keep these up

Callum

Mark Simpson

14th Dec '23

Thanks Callum, it is appreciated. Glad you find them helpful :-)

AJB

Couldn't agree more Callum. Pretty much my main reason for continuing to subscribe to Stockopedia.

doctor dave

Great overview Mark thanks so much.

Monty Carlo

15th Dec '23

Mark

Thank you for your efforts - but it is very difficult to place too much weight on your findings when you are forced to paste in 10 year charts that ignore dividends and special divis entirely. Not your fault.

Stocko consistently ignore my pleading (despite their verbal promises to sort it our 5 years ago). Until they bite the bullet and do total return properly it will undermine how much faith we can place in the Rank scores.

Ed will of course come up with his "average dividend yields" for various categories to paper over the absence, but it just makes things worse I'm afraid.

Anyone who has used a proper Total Return calculator knows it can utterly transform how you view the historic performance of certain stocks, in both absolute and relative terms.

Hopefully you can assist with making the case to the powers that be that this should be a priority for future development plans?

Tombholliday

22nd Dec '23

Dear Mark,

Earlier this year you were enthusing about Luceco - price unchanged to down and questioning the value of Zotefoams which has gone up. Could you update us on the bull and bear case here or have you changed your mind? no offence intended not every call works and some work after some delay and sometimes the facts change and one’s opinion changes

Rusty2

I hold both of those. Actually Luceco (LON:LUCE) has outperformed Zotefoams (LON:ZTF) this year, it is up about 25%, ZTF is only up about 8%. Zotefoams (LON:ZTF) has been quite a frustrating hold. I know Paul Scott is keen on it.

24th Dec '23

Interestingly, I summarised some thoughts on both companies recently here: https://smallcapslife.substack...

Not all my own work, it is an amalgamation of several contributors, but since I write these weekly summaries, I tend to broadly agree with them!

Basically, it comes down to the quality of the business. Do they consistently generate a return on capital above their cost of capital? With Luceco (LON:LUCE) they do, with Zotefoams (LON:ZTF) they don't. Yet on valuation, you are paying 12x forward earnings for a business with a history of good economics and 19x forward earnings for a business with a history of bad economics.

I get that history isn't always a guide to the future and that there is blue-sky potential with Zotefoams. However, if they had a history of generating innovative products that were actually profitable, then I'd be more willing to give them the benefit of the doubt over future products. Perhaps the recent retirement of the CEO will lead to better management with a greater focus on generating acceptable returns on capital. Paying a high multiple for unproven blue sky, or betting that a new management can fundamentally change a business that has been poor for many years, just isn't my style of investing. If you have a history of doing blue-sky investing better than me, then that's great, I wish you luck.

In terms of changing my mind, I will certainly do so, if the underlying performance of the businesses and the valuation changes. If Luceco (LON:LUCE) ends up on a P/E of 20 with a few years of ROCE in single digits it will almost certainly be a sell. If Zotefoams (LON:ZTF) ends up on a forward P/E of 10 and manages to double its ROCE, then it will almost certainly be a buy. Price action alone will not change my mind since the short-term link between the two is shaky, at best. Speculation can take the value of shares far above fair value, and despondency far below fair value. My aim is to do the opposite: buy the widely hated and sell what the crowd is most excited about. That's simply my preferred style, and it certainly isn't for everyone.

I respect Paul's analysis, and he does a great job on the SCVR. However, in terms of investing style, he is much more willing to bet on high-risk blue-sky or highly-valued stocks than I am. Sometimes it works out for him, sometimes it doesn't. I couldn't personally live with the level of volatility in performance he has over the last few years. But that's why we all have to come to our own investment decisions and find a style that matches our own risk tolerance and strengths and weaknesses.

It goes without saying, but I will labour the point just in case: purchasing any stock simply because myself, Paul, or any other market commentator likes it is bound to end in tears. As the market saying goes, "You can borrow someone else's idea, you can't borrow their conviction".

2023: A Year in Value

2023 Value Performance

A year of speculation?

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Mark Simpson

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