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How Combining Quality, Value And Growth Metrics Produce The Best Results
Finally. I’m ready to share what I call the “Action Score”. A score showing how combining quality, value and growth produces fantastic results. If you have time, check out the details of how I created the quality, value and growth ratings. Or here’s a quick summary for each. How the Action Score is Built As I mentioned, it’s a combination of 3 time and tested factors. 1. Quality Quality stocks are ranked and scored based on CROIC – signals competitive advantage, management effectiveness. CROIC between 23-40 is the best range to be in. FCF/Sales – signals cash generation ability, how efficient a company is. FCF/Sales has to be positive. Piotroski score – signals fundamental strength. Highest is best. 2. Value The Value score is based on P/FCF – has the biggest impact on the results and receives the highest weighting EV/EBIT – does a great job of identifying cheap stocks and receives the second highest weighting P/B – acts as a “cleaning” filter to remove stocks where you overpay for assets. Also a way to remove bad stocks you wouldn’t want to own no matter how cheap it looks Piotroski score – assigned a fairly high weighting so that the list removes “lotto” stocks 3. Growth Growth stocks are created using TTM sales percentage change – to find growing companies but also limited to a certain upper percentage to eliminate high flyers 5 year sales CAGR – to find growing companies that are not perennial losers Gross Profit to Asset Ratio (GPA) – a wonderful measure of profitability to find stocks that are making the best use of their assets to generate sales Piotroski F Score – assigned a fairly high weighting so that the list removes “lotto” stocks Each stock is given a Q, V and G score based on its data and rank. The Q, V and G scores are then averaged to give the final “Action Score”. I call it Action because these are the stocks I should be acting on. Whether it be reading, thinking or discussing. How good are these Action Stocks? Take a look. The Final Rating System – Backtested Performance These are the latest and final backtested results based on the newest edition of the algorithm. Full 2015 results are included to give a complete 17 year backtest. Q% is the full year percentage return for stocks with the highest Quality Score V% is the full year percentage return for stocks with the highest Value Score G% is the full year percentage return for stocks with the highest Growth Score Action Score% is the full year percentage return for stocks with the highest average of the Q,V and G scores Top 20 stocks are chosen at the start of each year All stocks held to the end of the year Fees, volume, slippage not considered Full Universe of Stocks Used in Backtest The final theoretical 29% CAGR performance of the Action Score is simply astounding, but it includes the entire universe of stocks in the backtest which skews the results. Trust me, you won’t be able to achieve the same results because it includes OTC stocks you won’t be able to buy due to limited supply or brokerage rules. Financial stocks are also included which skews results because certain ratios for finance stocks are inflated simply because of the nature of the business. That’s why I created a second version that excludes OTC stocks Financials Miners Utilities Click to enlarge No OTC, Financials, Miners, Utilities in Backtest It brings the final result down to 20% CAGR over a 17 year period. To keep it conservative, I think real money results will come in around 15%. I’ll still be uber happy with such long term results and once this is fully launched and running, I’ll be looking into creating a real money portfolio to really put it to the test. The Grading System Each Action Score is assigned a grade to make it easier to identify and analyze. Greater than 85 = A Between 75 and 85 = B Between 65 and 75 = C Between 50 and 65 = D Below 50 = F Distribution of 2016 Scores for Q, V, G and Action You’ll see that I’ve purposely limited the number of A grade stocks. Based on the data at the start of the year, here’s a look at the distribution of how many stocks are in each score range. In the current list there are only 68 A grade Action Stocks compared to 498 B grade Action Stocks. As you see below, a company really has to earn its place to get an A. Click to enlarge The Top 10 Action Score Stocks So that I don’t leave you hanging, here’s a list of the top 10 stocks with the highest Action Score as of the first week of January. With the price action going on in the market, some new stocks may have entered the top 10 in the last week, but there shouldn’t be too many differences. Click to enlarge The chart above shows the top 10 stocks with the best overall Quality, Value and Growth scores. ZAGG Inc. (NASDAQ: ZAGG ) B. Riley Financial (NASDAQ: RILY ) P&F Industries (NASDAQ: PFIN ) Tata Motors (NYSE: TTM ) Ennis (NYSE: EBF ) Apple (NASDAQ: AAPL ) Flexible Solutions (NYSEMKT: FSI ) Brazilian Distributions (NYSE: CBD ) Innospec (NASDAQ: IOSP ) Brocade Communications (NASDAQ: BRCD )
MLP ETFs Trading At A Huge Discount To NAV
The collapse in oil price has battered the energy sector as a whole, not sparing the master limited partnerships (MLPs) either. In fact, some MLP ETFs have fallen faster than the value of their underlying securities, creating a huge discount to their net asset value or NAV. This suggests an attractive entry point for long-term investors. This is especially true as the authorized participants (NYSE: AP ) of a discounted ETF steps in and redeems the underlying shares to remove the discount and restore the fund’s value back to its NAV. This process results in profits for the ETF holder when the market price rises relative to NAV (read: Is This the Worst Time For MLP ETF Investing? ). MLP: Is A Good Bet Right Now? Trading at deep discounts, the outlook for MLPs is bright amid the oil price rout. This is because most MLPs, which are engaged in the processing and transportation of energy commodities such as natural gas, crude oil, and refined products, are best positioned to withstand the decline in oil prices and be the major beneficiaries of an oil boom in the long term. Acting as toll-takers, these MLPs earn revenues on the volumes flowing through pipes and not on the commodity price. This nature of business will definitely give a boost to these stocks given that worldwide oil production is on the rise. Unlike exploration and production companies whose profits are directly correlated with commodity prices, MLPs have relatively consistent and predictable cash flows, making them safer and less risky than other plays in the broader energy space (read: Oil Hits 12-Year Low: Short Energy Stocks with ETFs ). Beyond the stability, yields are also pretty high thanks to some favorable tax rules – like we see in the REIT space – that push firms in the MLP space to pay out substantially all of their income to investors on a regular basis. Further, MLPs represent a great way of tapping the growing revolutionary developments in the field of unconventional energy. As a result, the steep decline in MLP stocks and ETFs provides an attractive investment opportunity to long-term investors, looking for growth and income. Below, we highlight some products that were trading at a steep discount to NAV as of January 15 (as per Fidelity ): UBS ETRACS Alerian MLP Infrastructure Index ETN (NYSEARCA: MLPI ) : Discount – 5.32% This product tracks the Alerian MLP Infrastructure Index, which comprises 25 mid-stream energy infrastructure MLPs. It has attracted $1.5 billion in AUM and trades in solid volume of 967,000 shares per day. The note charges 85 bps a year in fees and pays out a hefty yield of 8.04%. Credit Suisse Equal Weight MLP Index ETN (NYSEARCA: MLPN ) : Discount – 5.13% This ETN follows the 30 MLP Index, an equally weighted index that uses a formulaic, proprietary valuation methodology and comprises of 30 midstream MLPs. It has attracted $365.5 million in its assets base so far and sees good average daily volume of more than 325,000 shares. Expense ratio came in at 0.85%. The note pays out 7.53% in annual yield. UBS ETRACS Wells Fargo MLP Index ETN (NYSEARCA: MLPW ) : Discount – 4.69% This note tracks the Wells Fargo Master Limited Partnership Index, which provides exposure to all energy MLPs listed on the New York Stock Exchange or NASDAQ with market cap of at least $200 million. It failed to garner enough investor interest with AUM of just $7 million and sees paltry volume of about 13,000 shares. MLPW charges 85 bps in annual fees and expenses, and pays a solid yield of 9.82%. UBS ETRACS Alerian MLP Index ETN (NYSEARCA: AMU ) : Discount – 4.68% This product tracks the performance of the Alerian MLP Index, which provides exposure to 50 publicly traded energy MLPs. It has amassed $351.4 million in its asset base and trades in solid volume of nearly 468,000 shares. It charges 80 bps in annual fees and sports a dividend yield of 7.16%. RBC Yorkville MLP ETN (NYSEARCA: YGRO ) : Discount – 4.57% This note seeks to offer return of the Yorkville MLP Distribution Growth Leaders Liquid Index, which offers access to 25 MLPs exhibiting the highest distribution growth and superior liquidity profiles. It is also unpopular with AUM of $14.5 million and average daily volume of around 15,000 shares. Expense ratio came in at 0.90% and dividend yield stands at 8.54%. MLP ETNs vs MLP ETFs Unfortunately, there are some tax headaches when using the MLP structure, namely the possible need of a K-1 form at tax time. But this issue can be avoided by looking at MLPs that use an exchange-traded structure. This is because ETNs do not actually hold the securities of an underlying index. Instead, an ETN is an unsubordinated debt security that promises to pay out a return that is equal to an index. This is completely unlike an ETF that buys and sells the securities making up a particular benchmark. Due to this advantage, investors can buy MLP ETNs without the hassle of K-1 at tax time, making the above-products excellent choices for those seeking high yield without the taxation headache. Link to the original post on Zacks.com