GrowthRater Model Portfolio: Closing long position on Pearson for +22% MoM gain
It may not be a surprise, but we use the GrowthRater system to manage a model portfolio of long and short positions which we will provide some more detail on once we can get out for under this barrage of company results. Needless to say, the criteria we use is to go long stocks that offer a combination of undervalued growth and improving valuation momentum. By this we mean when a prospective GrowthRating is below both the longer term trend growth rate in organic revenues that we estimate for that stock or industry (ie fundamentally cheap) as well as being below the prospective organic revenue delivery (ie actually cheap). We also want to include stocks with a positive valuation momentum and offer the a valuation volatility that we judge to be appropriate to the market environment and our confidence in the respective industry trends at that point. Volatility is neither good nor bad. Sometimes it can be used to hedge or leverage a position depending on forecasting confidence. What is important however is knowing what it is, which is why we quantify and show you what it is on each stock and then let you play around with some of the assumptions on our web analytics service to remodel valuations! For our short’s we basically apply the criteria in reverse.
As the GrowthRater valuations are based on a dynamic market cost of equity that we calculate, it is also important to note that we evaluate our positions on a market neutral basis. Details of our positions are also supplied purely for information purposes and to help investors understand our unique valuation approach and are not intended to be treated as recommendations, merely what we may be doing ourselves.
To kick off the process I would like to revisit a stock we added to our long position just over a month ago.
On the 20 January we added Pearson when markets dumped on the price ahead of its pre-close IMS and the shares had dropped down to under 655p per share and which we featured at the time in our blog post.
“Pearson’s moment of truth – tomorrow’s 2015 pre-close IMS” http://growthrater.com/5027-2/
Closing long position on Pearson at >=800p ps for a month on month gain of approx +22%
Having clearly been asleep at the wheel this Monday when the shares closed at 819p and kicking myself over the last couple of days as the shares slipped back from this, I am closing this position now that the shares have edged back up to over 800p again. This therefore represents an absolute gain of approx +22% in just over one month and a relative increase against the FT Allshare (which is up +5% from 3,123 to now 3,280) of over +16%.
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