Tag Archives: seeking-alpha

Achieving 16.7% Returns With The Value Score

Summary What is the OSV Action Score? What is the OSV Value Score? How was the Value Score created? The Quality Score produces 16.8% CAGR in the tests that I’ve performed for the upcoming “Action Score” that I’m implementing into Old School Value. Next is the Value Score. Here is the full table of results again. stocks are bought at the beginning of the year held for one year rebalanced after 1 year commissions and fees are not included into these results If you followed this strategy, the 16.74% is the max return. After fees, it likely comes down to 13-14% range annualized. Here’s How I Created the Value Score When you create a ranking system (or even a screener) the higher the number of criteria, the worse the performance becomes. When picking individual stocks, making sure a stock passes lots of checks is a good strategy because you allocate based on your conviction. However, when you try to employ any sort of quantitative strategy, it is not a good idea to list 20 different criteria that must be passed. Of all the tests I’ve performed, a strategy with lots of checks consistently lose to the market by a wide margin. I mention this because people ask me whether I’ve tried combining several of the best performing value screeners on display. I have. And the results are pathetic. It severely handcuffs the number of stocks that pass and the screen ultimately fails. When you pick stocks individually, you have to be precise and picky. For anything quant based, it needs to be looser as you are buying a bunch. As I mentioned in the Quality Score article, instead of blindly coming up with metrics for each Q, V and G, I already had a list of metrics for each methodology based on previous research papers and proven results. Then the theory was tested and confirmed via backtesting. In its purest form, the Value Score is based on the following 3 factors: P/FCF – best range is less than P/FCF of 10 EV/EBIT – best range is less than 11 P/B ratio – preference for P/B to be less than 3 Here’s the initial backtest to confirm the theory for a 20 stock holding portfolio. Eliminating OTC stocks, financials, energy, mining or utilities and the results continue the outperformance. Great. Backtest works with the selected metrics. It now comes down to how well the same idea can be applied when creating a ranked database. To further clean up the results, additional weightings were applied to each of the above ratios. Then all the stocks are further ranked with the Piotroski score again to eliminate low quality stocks. 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 The Piotroski score is assigned a fairly high weighting so that the list removes “lotto” stocks and potential black swan stocks The Value Rank Results Even if I did follow this strategy, it’s not an easy one to follow. There is a LOT of volatility. If you can’t stomach big moves and have faith in the process, you are doomed. If you focus too much on beating the market each year instead of an absolute long term return, you are doomed. When buying and holding the top 20 ranked Value stocks each year for the entire universe of stocks, the scoring system achieves 16.74% CAGR. If you start with $10k, you’d end up with $138k after 16.5 years. Eliminate OTC, financials, miners, utilities and energy again and the results are shockingly great at 19.4% CAGR. $10k becomes $203.6K after 16.5 years. But what I don’t like about the Value Rank on its own is the lack of downside protection in 2008. Cheap stocks and growth stocks get hammered the most during severe bear years. But a -40% return is a huge blow and a can easily shatter your faith in the system and process. Something to think about. Top 20 Value Stocks from 2015 Here is the list of top 20 stocks that make up the Value Score portfolio starting from Jan 1, 2015 so that you get a sense of what type of stocks the Value Rating is selecting. Disclosure No positions in any stocks mentioned.

Is Now The Time To Look At Floating Rate Bonds?

Summary Now that the Fed has begun raising rates, investors should refocus on risk minimization over yield maximization. Investors reaching for yield in securities like MLPs and high yield bonds have been hurt badly since the beginning of 2014. The iShares Floating Rate Bond ETF focuses on short term investment grade floating rate notes and carries an effective duration of just 0.14 years. In light of the Federal Reserve’s persistent zero interest rate policy, many investors have traveled further down the risk/return spectrum in order to improve yields on their portfolios. Anybody that’s dabbled in MLPs or high yield bonds over the past two years probably knows very well the risks that come with reaching for yields. The ALPS Alerian MLP ETF (NYSEARCA: AMLP ) is 40% off of its recent high while the high yield bond index is down over 20%. AMLP Total Return Price data by YCharts Now that the Federal Reserve has finally begun moving away from its zero interest rate policy and rates are slowly on their way back up, it might be time to focus more on principal preservation instead of yield maximization. Staying on the short end of the yield curve can certainly help accomplish that task but floating rate bonds should also be a consideration. The iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) is the biggest floating rate note ETF out there at nearly $3.5B in assets. Its current yield of 0.5% won’t necessarily get income investors excited right now but its risk mitigation characteristics will once rates begin moving significantly higher. This ETF is benchmarked to the Barclays US Floating Rate Note

Focus On Less Leveraged Companies When The Markets Get Squirley

By Eric Bush, CFA, Gavekal Capital Blog 2015 is looking like one of those years in the stock market where it feels like investors have wasted a lot of time and effort for nothing. We have undoubtedly had a lot of ups and downs, both literally with stock prices and emotionally for investors, and all we have gotten in return is a market that is basically flat (intraday, the S&P 500 is a whopping 48 bps higher YTD). We all know that even in a flat market, however, there are pockets of the market that have done well (i.e., growth counter-cyclicals ) and that have performed poorly (hello to energy stocks and to our friendly neighbor to the north ). For investors who think a more volatile market is here to stay for 2016, it may be helpful to focus their attention on companies with less leverage. This strategy paid off in 2015. In the scatter plot below, we plot median YTD performance (y-axis) against median long-term debt (LTD) as a % of total capital. We are looking at industry groups for both emerging market and developed market companies. As you can see, companies with lower overall levels of long-term debt as a percentage of its total capital tended to have higher equity returns this year. In fact, if we look at equity returns over the past four years, we see that this relationship continues to hold. We would be surprised if in 2016 more liquid companies didn’t continue to dominate their more leveraged peers. (click to enlarge) (click to enlarge) (click to enlarge) Disclosure: None.