Tag Archives: phoenix

Secrets Of 2015’s Top 3 New Hedge Funds On Interactive Brokers Hedge Fund Marketplace

A great place to look for the smartest managers: Interactive Brokers (NASDAQ: IBKR ) has long been the trading venue of choice for sophisticated high net worth investors. Chairman and CEO Thomas Peterffy once explained the reason for this: “We believe that the better the prices we get for our customers, the better their performance will be and the more business they will bring to us. On the other hand, our competitors believe that most customers cannot tell the difference between good and bad executions. I think we’re both right. As a result, they end up with the customers who cannot tell the difference, and we end up with those who can. I like the side we are on. ” The point he is making applies equally to new hedge fund managers; the smartest, most client-oriented managers will find their way to the trading platform with the lowest-cost and best execution. Interactive Brokers leads by a mile in this respect due to its highly automated processes. It can be extremely difficult to find smart new hedge fund managers due to marketing restrictions that regulators impose. For that reason I was very excited to learn of the new Hedge Fund Marketplace that Interactive Brokers recently launched. This allows clients who are high net worth/accredited investors to request information on those funds which use Interactive Brokers for trade execution. If investors like what they see, they can invest directly in the funds through the platform. Given that the smartest new managers are likely to migrate to the IBKR platform for its low costs, the Marketplace should represent an excellent source of prospective hedge fund investments. With this in mind I looked up the top 3 new funds in the Marketplace based on 2015 returns. Since performance is generally higher for new hedge funds , I restricted my analysis to those that were founded from 2014 onwards. 1. Summit Premium Plus Fund Limited Partnership Fund manager contact: Malcolm Clissold Investment approach: Mr. Clissold runs a registered investment advisor known as SCC Capital Group . Mr. Clissold’s investment approach is to use technical analysis and a quant-oriented approach to position the fund’s investment portfolio. The technical indicators used to time investments include advance/decline measures, new highs/lows, interest rate measures, price/volume measures, price/volume trends and relative strength indicators. Discussion: From the detail given on technical measures used, these appear to be fairly well-known techniques so the magic of this fund is probably in its quant model. It can be difficult to assess quantitative strategies without knowing the inner workings of the “black box”, which of course managers are hesitant to publish. Prospective investors in this fund should request that detail in a discussion with the manager. Since speaking with the manager is outside the scope of this analysis, I’ll move on to other funds where it’s possible to figure out the source of superior returns from the available written material. 2. Shannonside Capital Fund Fund manager contact : Brian Flynn Investment approach: Shannonside follows a long-term, fundamental value approach in its long/short stock-picking strategy . The manager conducts extensive research calls to industry experts in addition to reading all the company filings, news archives and conference call transcripts to build up a mosaic on prospective investments. They look to invest in situations where the picture that they’ve meticulously assembled on a company is different from what the market (mis)perceives . This is the kind of second-level thinking that Howard Marks describes as critical to generating superior returns and is a solid reason for believing that an investment could be a bargain. It is also a very difficult approach to copy due to its time-intensive nature. The fund holds a concentrated portfolio with large positions taken in its top ideas. Discussion: Shannonside can go the extra mile with its research because it first filters the investment universe down to a smaller pool of interesting stocks using proprietary screens. These guys are willing to hold a concentrated portfolio in their best ideas. Hence they can focus their research on a small number of promising opportunities. Other managers that can’t handle volatility must be much more diversified (the norm is to hold over 200 stocks). Diversified managers can’t focus on their top ideas because they have to spread research efforts among many more stocks. Diversification (deworsification?) is the norm in the fund management industry because most managers are afraid of losing their jobs if they under-perform in the short run. My point is that Shannonside’s process is difficult for other managers to copy. As such it may generate superior returns for many years to come. Negatives: As a European-domiciled fund, Shannonside Capital Fund is not currently available to U.S. investors. It is a concentrated fund with big positions in its top ideas so it is only suitable for investors that can ride out temporary volatility along the way to building long-term wealth. For those who can, Shannonside may present the opportunity for excellent returns of the kind the fund earned in 2015. 3. Phoenix Capital Fund, LP (Note – I’m only analyzing new funds here so some older funds that had higher returns than Phoenix in 2015 are not discussed) Fund manager contacts : Erik Trofatter, Jordan Causer Investment approach : Short option premium selling. Phoenix’s managers sell short high probability, out-of-the-money option premium on liquid and efficient underlying securities. Furthermore, the fund times its trades in an attempt to sell short option premium on underlying securities that are trading at the high range of their implied volatility. Discussion: Out-of-the money call options with strike prices far above the current market security price are like lottery tickets – there is a low probability that they pay off big if the security moves up by a lot but most people who buy these will lose the amount they paid for their “ticket”. By going short a portfolio of out-of-the-money call options, Phoenix is like a lottery operator – selling overpriced “tickets” to all the punters who dream of hitting it big. On the other side of the spectrum, nervous investors are also willing to pay a steep price for insurance against extreme downside events. By going short a portfolio of out-of-the money put options, Phoenix is like an insurance company that sells insurance for 100-year storms to buyers whose area only gets hit by a storm once in a thousand years. By timing trades, Phoenix is like an insurer that tries to only sell insurance when insurance premiums are expensive. In other words, it seeks to sell when volatility is high with the hope that vol will revert to the lower norms of the past. In selling lottery tickets and tail-risk insurance, the fund appears to be designed to take advantage of the human tendency to pay too much for these products. Peoples’ willingness to pay above the odds is a result of a bias to overweight low-probability events. This ingrained tendency was studied by Daniel Kahneman (author of “Thinking Fast and Slow”) and Amos Tversky when they developed prospect theory . The result of this bias is that positive long-term rewards are possible for firms that sell lottery tickets and insurance to the “suckers” that pay too much. If this is what Phoenix is doing, they could certainly generate excess returns for years to come. Negatives: The main downside to this type of strategy is that it could be like picking up pennies in front of a steamroller. The fund could appear to be consistently profitable by earning premiums from selling out-of-the-money options, and then a flash crash or 1987-style rout hits and suddenly all the out-of-the money put options jump to become in-the-money. In such a market, losses from selling puts could result in a big hit to the portfolio. I think the best way to get comfortable with this risk is to appropriately size any prospective investment in the fund. Conclusions: Hedge fund managers generally have their best years when they are young, hungry and driven but due to marketing restrictions this is also when they are hardest to find. Interactive Brokers Hedge Fund Marketplace is an exciting new place to discover managers at this early stage. This service should accelerate IBKR’s growth because it will attract new hedge fund clients to its brokerage platform. It is great for clients because they can find rising hedge fund stars and it is great for the funds because new clients can invest through the platform. As discussed above, I think I’ve found funds that could generate superior returns for investors for years to come. I’m excited to look further because I’ve only scratched the surface of what is available. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SHANNONSIDE OR PHOENIX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

How I Created My Portfolio Over A Lifetime – Part III

Summary Introduction and series overview. Allocating within an asset class. Allocating stocks across sectors. Summary. Back to Part II Introduction and Series Overview This series is meant to be an explanation of how I constructed my own portfolio. More importantly, I hope to explain how I learned to invest over time, mostly through trial and error, learning from successes and failures. Each individual investor has different needs and a different level of risk tolerance. At 66, my tolerance is pretty low. The purpose of writing this series is to provide others with an example from which each one could, if they so choose, use as a guide to develop their own approach to investing. You may not choose to follow my methods, but you may be able to understand how I developed mine and proceed from there. The first article in this series is worth the time to read, in my opinion and several of the many comments made by readers, as it provides what many would consider a unique approach to investing. Part II introduced readers to the questions that should be answered before determining which assets to buy. I spent a good deal of that article explaining investing horizons, including an explanation of my own, to hopefully provoke readers to consider how they would answer those same questions. Once an individual or couple has determined the future needs for which they want to provide, he/she can quantify his/her goals. If the goals seem unreachable, then either the retirement age needs to be pushed further into the future or the goals need to become attainable. I then explained my approach to allocating between different asset classes, and summarized by listing my approximate percentage allocations as they currently stand. In this article, I will explain how I determine how I allocate investments within each asset class and why. The answer to that last part [why] may be different for each investor and will affect how each one allocates. The reason for avoiding an asset class may be as simple as not having the time or adequate understanding of real estate rental properties or fixed income. I started small in real estate, just I did in every other asset class. I learned on the job, so to speak, and kept the amount that I put at risk low until I gained adequate understanding. That is not to say I didn’t make mistakes. I did, probably in every asset class. But I am happy with where I am today, and continue to add systematically. How I add new assets is also explained in the previous article, as well as what I would have done differently if I could start over again today. Once again, just to be clear, this is an explanation of how I do things, and is not meant to be a one-size-fits-all solution for everyone. Some of you may like it, others, I suspect, will not. That is life. But if you can find something of use in one or more of the articles in this series that helps your understanding and improves your approach to investing, then I have done my job. This article covers so much ground that, even though I tried to keep things brief, I found it necessary to chop it into two parts – this one and Part IIIa. This article will focus on how I am allocated within equities, which account for about half of my overall portfolio. The continuation piece will address my allocations within the fixed-income, real estate and precious metals portions of my portfolio. I intend to delve deeper into examples of when and why I bought some specific stocks, why I continue to hold and how I protect those asset against significant losses in future articles of this series. Allocating within an asset class The purpose of allocating across an asset class is to reduce risk through diversification. If an investor concentrates too much of their portfolio in any one asset or category within the asset class, they could find themselves suffering significantly greater losses than if they had spread those investments against several unrelated holdings. The same is true for allocating across multiple asset classes. While there were very few places to hide during the financial crisis, appropriately called the Great Recession, some assets held up better than others. Thus, proper diversification did help reduce losses for some. But even then, there were losses in just about everything, and what mattered most was holding onto the assets that rebounded the fastest. That would be bonds, especially Treasuries, then commodities (including precious metals), next stocks, and finally, real estate. But all rebounded from the depths of the crisis, and this was the most important lesson. Please do not sell when all seems lost. “Buy when there’s blood in the streets, even if the blood is your own. ” The quote is credited to Baron Rothschild during the 18th century. He made a fortune buying during the panic that followed Napoleon’s defeat at Waterloo. Allocating Stocks There will be those who will not like my method of allocating stocks (and probably the other asset classes as well), but this is just how I do and the logic behind my (seeming to some) madness. I rarely buy a stock of a foreign company that is not traded on one of the U.S. exchanges. I am of the opinion that one can achieve plenty of international exposure by purchasing multinational companies with operations around the globe. If you want exposure to currency fluctuations, it is also included within the results reported by the big multinationals. Think about it. Now that the U.S. dollar is strengthening again, U.S. multinationals are blaming lower earnings on foreign currency translations. Of course, when the dollar was weakening, the earnings added by foreign exchange (FX) were not reported in the headlines, but those earnings were helped significantly. Some will say that I risk missing huge potential gains in China and other emerging markets, but I say I am avoiding the outsized risk by not investing directly in companies for which the accounting standards may vary greatly from U.S. generally accepted accounting practices (GAAP). Being a CPA, I have an adequate understanding of GAAP, and I am aware of the many different accounting standards followed by other countries (and the standards all change over time in each country). I prefer sticking to what I understand, since even in the U.S., some companies tend to stretch the standards as far as possible to achieve the desired results. I have five basic rules that I try my best to follow in allocating my stock portfolio. Rule Number 1 – I allow myself no more than ten percent of my total stock portfolio (not the total portfolio, but just that portion allocated to stocks) to be tradable, in order to take advantage of special situations. One purpose that I use these funds for is to purchase hedge positions to protect the rest of my stock portfolio from significant loss. I never use more than two percent in any given year for this purpose. I have been hedged for most of the last two years, but have been able to do so at a cost of less than one percent per year, as it turns out. My reasoning is that even if it costs me an average of 1.5 percent per year for five years, or a total of 7.5 percent, I prefer paying for the “insurance” than risking a loss of 30 percent or more if a bear market hits. At the same time, I continue to collect my dividends, and since I only buy what I consider to be high-quality stocks with sustainable competitive advantages that increase dividends every year, why would I want to sell? I like the income. Occasionally, there is a company that I believe has significant appreciation potential over the short-to-intermediate term. I want to be able to take advantage of such opportunities, and will do so, but only from within this small portion of my portfolio. Setting a limit this way keeps me from taking on too much risk and from making too many bonehead mistakes. I do not buy a stock on the recommendation of anyone else without doing my own due diligence to make sure I understand the potential risks and rewards. I even keep the funds segregated in a separate account and adjust the amount only once a year. It often sits mostly, if not totally, in cash or VFIIX waiting for something to intrigue me. Rule Number 2 – I try to own stocks of companies from at least eight different sectors. I do this because of sector rotation. It happens all the time, and I prefer to have at least some of my stock positions going as the respective sectors lead the market, while other sectors are falling behind. Too much concentration in any given sector can cause more pain than is necessary. Just ask anyone who has an overweight position in energy stocks from over a year ago. Or ask someone who holds a lot of stocks concentrated in other resource commodities, like precious metals, iron ore, or industries that serve the companies in the resource industries. Many are already down by 20 percent or more, and some are down more than 50 percent. Too much concentration, especially after a long bull run, can kill a portfolio. Rule Number 3 – I only invest in those industries that I can understand. This does not mean that I have to be an expert on the industry, but rather that I can decipher the accounting methods used and be able to compare one company to another or against industry averages. In other words, I want to have the confidence that I can identify the best companies in the industry, and maybe even more importantly, to identify the worst companies in the industry. Rule Number 4 – I only invest in quality companies with a consistent record of increasing dividends even in the worst of economic times. This rule does not apply to my tradable account mentioned under rule 1. But it does apply to every other stock that I own. I only want to own stocks of companies that have sustainable competitive advantages, strong balance sheets, a consistent track record of raising dividends annually and the cash flows to continue to be an industry leader and continue raising dividends. If you would like to understand more of how I develop my candidate list for further research, please consider reading my article, ” The Dividend Investors Guide to Successful Investing .” It is dated (written in 2012), but the principles still make sense. Rule Number 5 – I do not allow myself to invest more than 20 percent of my stock portfolio in any one sector initially. If the stocks in the sector appreciate faster than my overall portfolio, I will adjust the weight down once a year, but only if it exceeds 25 percent at the time of my annual review. I think that one is self-explanatory. Everyone has their own limits. These are mine. Yours can be different. But at least put some thought into this one and get comfortable with how much you hold in any one sector. Remember, concentration can lead to excessive risk. Now, as to how I allocate between the sectors and how I weight them. I start with the S&P 500 weighting of sectors, since when I measure how I am doing, I generally use that index to compare against. But this is just a starting place. I then adjust the weights according to my personal preferences and expectations. S&P 500 Index Sector Weights Information Technology 20% Financials 16.6% Health Care 15.2% Consumer Discretionary 12.9% Consumer Staples 9.7% Energy 7.3% Utilities 3.0% Materials 2.9% Telecommunication Services 2.4% (Source: S&P Dow Jones Indices ) Ever since the financial crisis, I have found myself unable to invest in banks. No one knows what the real value of assets on those balance sheets should be with certainty. We do not even know what the banks hold for sure. My portfolio weight for financials is less than five percent. I know I have missed a great run, but I see another problem coming in the near future that dwells within this sector, and I would prefer to miss it, thank you very much. I currently do not hold any positions in the materials sector; however, I will again at some point in the future, as prices for mining and metals companies have been beaten down, with resource prices in a downtrend since the peak in 2011. There is an oversupply problem that needs to be worked out, probably by some consolidation and some closures. As that begins to happen in earnest, I will get interested again. It is a cyclical sector, and understanding the cycles (that can last 30 years from one peak to the next, or from trough to trough) is a key to taking advantage of the opportunities that can be captured. Since we are near a peak in stocks, in my opinion (and near is a very relative and debatable term since for me it means probably within two years), I am also underweight in the consumer discretionary sector and industrials. My weighting for energy has fallen, not because I sold companies, but because I rarely sell and we are only now nearing my last purchase prices on the stocks that I own. I realize these may go lower, and then I will buy more at even better bargain prices. Remember, think long term. So, here is my current sector weighting table: Health Care 18% Consumer Staples 18% Information Technology 17% Utilities 14% Energy 9% Telecommunication Services 8% Industrials 8% Financials 4% Consumer Discretionary 4% I had intended to halt the discussion on this topic here until I split the article. So, at the risk of getting long-winded again, I will try to explain how I ended up with this allocation, at least in general terms. I will get into more of the detail further into the series. To begin with, I should point out that my stock portfolio is fully hedged against calamitous loss in the case of recession, should one occur. If it were not, my portfolio would represent a more defensive nature. Speaking of which, Consumer Staples, Utilities and Telecommunication Services are generally regarded as defensive in nature, because the products and services offered by companies in those sectors tend to the ones we buy regardless of the economic climate. Who is going to do without food, electricity, water, phone service or toilet paper (unless you live in Cuba)? Fortunately, our stores rarely run out of the necessities, and we rarely choose to not buy such items. But because I hedge, I can partially ignore the inconvenience of shuffling my portfolio in an attempt to match the “risk-on” or “risk-off” gyrations due to changes in the perceived economic environment. All the adjustments to portfolios are great for Wall Street, because it increases trade volume, which increases its revenue – but for investors, all that activity just increases expenses. Think of it this way: Every time an investor reallocates investments within his/her equity or bond portfolio, what they really do is shift a small portion of their assets to a brokerage firm (Wall Street). Why else would they tell us to do that at least once a year? Sure, there is sound reasoning for reallocation based upon financial theory supported by empirical data, but the result is still the same. Wall Street wins. The house always wins, especially when we listen to house advice and follow house guidance. Thus, instead of trying to be in the right sector at the right time, I try to be in the right stock for the long haul, knowing that there will be speed bumps and setbacks along the way, but also knowing that the laws of time and compounding will eventually work out in my favor as long as I have selected well. That is one of the key underpinnings of investing as far as I am concerned. Selectivity, compounding, rising dividends and value. Combine those four concepts, and you end up in a good place somewhere down the road. What do I mean by selectivity? I start by developing a list of companies that I would like to own if the prices of the respective stocks ever reach extreme value levels. If you want to understand how I create my list, please consider reading my articles in the series, ” Dividend Investors Guide to Successful Investing .” The initial article explains how I rate companies within industries to identify those that qualify for further consideration. Basically, what I look for are companies that stand head and shoulders above the competition. Companies on my list pay dividends with a yield equal to or higher than average for the industry, while maintaining a payout ratio at or below the industry average. One should not look at one of those factors without the other. I also want my list companies to have debt-to-capital ratios at or below the industry average, consistently rising dividends and higher-than-industry-average growth in both revenue and earnings (not just on a per share basis). To land on my list, a company must maintain a credit rating of investment-grade or have no debt, and it must have positive free cash flow. Once I have the list from all industries that I at least think I understand, I consider qualitative aspects of management and business model. I also consider the long-term sustainability of the industry, and try to shy away from those industries that are under attack (or likely to be so) from disruptive technologies or changes in cultural/societal perceptions. Think coal, nuclear utilities or processed foods. Public perceptions change over time. Identifying the shifts can help avoid some pain. On the positive side, I look for companies that have developed a moat to defend their position against competition. Some moats are stronger than others. Patents are great for as long as they last. Consistently staying ahead of competition through innovation is also great for as long as it lasts. Corporate culture can be a huge advantage or a huge barrier. A brand that is recognized the world over and is associated with positive images and values that consumers admire can be a powerful way to differentiate, and can provide a competitive advantage. When a brand gets tarnished, it is hard to rise back to a dominant position. But companies that have exhibited the ability to do so in the past are likely to be able to do so again in the future, and when things look really bleak for such companies, there is often great value. International Business Machines (NYSE: IBM ) is a great example. Some readers will not remember how badly IBM managed the shift from mainframe computers to minicomputers to desktop computers. The company’s products had been considered top-of-the-line for some time, but competition caught up and passed it by in many areas. The culture that had made the company successful in the past was holding it back from entering the future at full speed. It fell behind the curve, and the brand was tarnished relative to its previous position. Then management was caught using aggressive accounting practices to book revenue on systems that had been built and shipped to distribution warehouses as part of sales, having not yet found buyers for the product. This practice finally caught up to it, and the company had to adjust it financial reports and accounting practices. But IBM finally reorganized itself and focused on services and software instead of hardware. It took time, but the transformation was a huge success. The brand was back. Today, the company is going through some more problems, and the question of whether it will be able to transform again is still unanswered. The problems will probably get worse before they get better from here. So, IBM, which made my list a few years ago, is now back on probation until it proves that it can do the phoenix thing again. I will get into more examples later in the series, and hope that the details will be instructive. The bottom line is that, because of my overall investing strategy, I rarely pay much attention to how much I have in any one sector or industry. In truth, I just wait for what I consider to be bargain entry points, and buy what I believe will provide reliable income growth over the long term. Summary This concludes my explanation of how I allocate within sectors inside the equity portion of my portfolio. In Part IIIa, I will go through the rest of my portfolio. Part IV, as promised, will provide an explanation of my understanding of flash crashes and how the various parties interact to exacerbate the problem. As always, I welcome comments and questions, and will do my best to provide details and answers. This is one of the best aspects of the SA community. We can learn from each other and share our perspectives so that other readers can benefit from the comprehensive knowledge and experience represented here. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

How To Hunt For Deep Value Stocks With Bravery Over Patience

Everyone loves a bargain but choosing a strategy for finding mispriced shares isn’t as simple as it seems. Eighty years after Ben Graham and David Dodd laid the groundwork for what’s known as value investing , some of the brightest minds in finance are still working on the best ways of capturing deep value. Given that research has long shown that cheap beats expensive over the long run, honing a value strategy is clearly worth exploring. So where do you start? When Graham and Dodd wrote Security Analysis in 1934, they changed the rules on how investors should think about stocks. Chastened by catastrophic stock market losses a few years earlier, they urged investors to stop chasing expensive “glamor” and obsessing about earnings growth. Instead, they showed that it was mispriced and undervalued stocks that offered the best chance of outperformance. Ever since, investors have deployed an armory of metrics to help them find shares that don’t reflect the expected value of the companies behind them. Usually, they compare a company’s share price against what it earns — such as the price to earnings ratio — or against what it owns — such as the price to book ratio . One value ratio is never enough When it comes to these value ratios, investors often stick to their favourites. Just take a look at the the guru strategies we track at Stockopedia — many of them use just one valuation metric. But others think it’s too simplistic to use a single ratio to find and compare value stocks. In 2014 the equity research team at investment bank Societe Generale tackled this head on. Led by quant strategist Andrew Lapthorne, they’d already been tracking one value strategy called Quality Income . As the name suggests, it looks for good quality, dividend paying companies. But the focus on relatively high dividend yield is also a signpost to shares that might be cheaply priced. Quality Income was devised for what SocGen call “patient” value investors. These are the ones who are happy to let dividends compound over time in return for less volatility than you see in other types of value strategies. But Quality Income doesn’t get its hands dirty with another major source of value in the market. This is the one that most of us think of when it comes to deep value — buying beaten up, distressed, unloved and ignored stocks. Some of these laggards will never recover but others will bounce back and then some. So SocGen created an alternative strategy for the “brave” investor. Rather than rely on one single ratio, it combines five well known value factors to find stocks that are cheap relative to their sectors. Bravery is needed because these could well be companies with problems. And that means there can be sharp initial losses before the value in them eventually “outs.” The factors include: Book to Price Earnings to Price One Year forward Earnings to Price EBITDA to Enterprise Value Free Cash Flow to Price In 2014, its SG Value Beta index of the 200 cheapest companies globally returned 18.7%, which was broadly in line with other value-based indices. Since 2002, based mainly on back testing, it has consistently outperformed those benchmarks. (click to enlarge) Screening for “brave” deep value stocks Of course on reading the research it became very clear to us that the SocGen team had chosen a strikingly similar set of value ratios to Stockopedia.com’s own ValueRank — with which we already score over 18,000 European and US Stocks. Out in the cold… It’s pretty clear which sectors are currently out in the cold. Oil & gas producers like Ophir Energy ( OTC:OPHRY ) and oilfield services businesses like Petrofac ( OTCPK:POFCY ) and Hunting ( OTCPK:HNTIY ) have been beaten down of late. Likewise, there is a handful of industrials like Serco ( OTCPK:SECCY ), which slumped after issuing a series of profit warnings last year. Troubled cyclicals like pub groups Punch Taverns ( OTCPK:PCTVD ) and Enterprise Inns ( OTCPK:ETINY ) make the list, as does retailer Debenhams ( OTCPK:DBHSY ). Interestingly Debenhams had a ValueRank of 94 back in October 2014, but a gradual edging up in price has trimmed that back to 90. Financial stocks also feature heavily, with Standard Chartered ( OTCPK:SCBFF ) easily the largest by market cap. TSB Banking ( OTCPK:TSBBY ) is also there, as are insurance groups Friends Life ( OTC:RSLLF ) and Phoenix ( OTC:IPHXF ). Name Mkt Cap £m Value Rank Sector Standard Chartered 22,625 93 Financials Petrofac 2,627 91 Energy Phoenix 1,884 97 Financials Indivior 1,276 95 Healthcare Vedanta Resources 1,212 94 Basic Materials Serco 942.5 90 Industrials Debenhams 933.4 90 Consumer Cyclicals MHP SA 637.5 96 Consumer Defensives Deep Value is not for the faint hearted… It’s important to remember that digging around among the cheapest stocks in the market isn’t for the faint hearted. Often these companies come with uncertainty surrounding their financial strength or business viability. It was for that reason that Graham and Dodd encouraged wide diversification — a portfolio approach should harvest the deep value premium and absorb the inevitable losses. In the decades since they introduced the concept of buying undervalued stocks, numerous financial ratios have been used as a measure of what’s cheap. But rather than relying on a single measure, a value composite using several of those value factors is proving to be an effective way of navigating one of the trickiest parts of the market. Editor’s Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.