Value Stocks Struggled This Year. Try These 3 Tips For 2016

By | December 30, 2015

Scalper1 News

Summary Value stocks often struggle in down markets. 2015 was a hard year for value investors. Employing these 3 simple tips may help value investors have a better 2016. Value investing is attractive because you get more for less. Well, academics won’t put it exactly that way – they might be inclined to say that you get more excess return on average for greater risk taking. What does that mean? If I get more return on average isn’t that, by definition, less risky? Portfolio123 has a value screen with common factors such as price to sales, price to book and price to earnings ratios. Since 1999 if you held the 50 top ranked value stocks in the S&P 500 and replaced these holdings weekly, the result would have been a return of 13.5% annually. Where is the risk there? Just look at the bear markets. In 2002 the S&P 500 took a turn for the worse. The blue line is the S&P 500 and the red line represents the value strategy. (click to enlarge) Wash and repeat for 2007-2009. (click to enlarge) 2015 was also a tough year for value investors. Holding the 25 highest dividend yielding stocks resulted in some ugly under-performance. (click to enlarge) Holding the 25 lowest price-to-earning ratio stocks also resulted in below average returns. (click to enlarge) If we had invested in the 25 highest ranked value stocks, according to the Portfolio123 ranking system, with a minimum 3% dividend yield, this would have been our year. (click to enlarge) It almost doesn’t matter which value factors you go for – the response for 2015 is pretty much the same – YUCK! Now I see the risk. If you are a value investor, how can you manage some of the downside risk? Here are 3 pointers that seem obvious – but that doesn’t make the advice any less beneficial. 1. Diversify. A well-worn cliche, but for a good reason. Although bear markets have a way of pulling everything down at the same time, you will still minimize the risk of being loaded into one sector that goes poof! 2. Check short interest. Check on the percentage of shares sold short (try saying those ‘shares sold short’ 3 times really fast). If short interest is high, a lot of people are betting for an additional downside loss. It may not turn out that way, and it could even flip into a short squeeze, but if you want to play it safe stay away from these volatile tug-of-wars. I prefer stocks with short interest of 2% or less. 3. Get less active. When things go wrong it is only natural to want to fix it. So you sell your value stocks in order to buy different value stocks with an even better earnings or dividend yield. Those stocks tank so you jump ship and try again. You need to slow it down! Profits can compound when things go right but losses compound when things go wrong. When in doubt – stop. Wait. Ride it out. Don’t try to fix it. Value Investing 2015 Re-visited Let’s add the first 2 of these simple guidelines into our trading system (top 25 value stocks in the S&P 500 with minimum 3% dividend yield) to see what effect it would have had in 2015. We add a rule that says no more than 1.5% short interest and a maximum of 3 stocks per sector. (click to enlarge) That’s a bit more palatable. The lesson I am taking with me into 2016 is to slow things down, keep an eye on short interest and yes – as we’ve been told before – diversify. Here is a sampling of a few dividend value stocks that would currently meet the above criteria. Ticker Name Value Rank MktCap SectorCode PEInclXorTTM ProjPECurFY Yield (NYSE: MET ) Metlife Inc. 99.8 54634.58 FINANCIAL 9.52 9.77 3.06 (NYSE: WRK ) WestRock Co 95.19 11788.59 MATERIALS 14.38 13.11 3.27 (NYSE: ETN ) Eaton Corp Plc 92.18 24565.42 INDUSTRIAL 12.29 12.53 4.14 (NYSE: ADM ) Archer-Daniels-Midland Co 82.36 22291.09 STAPLE 12.88 13.64 3.02 (NASDAQ: CSCO ) Cisco Systems Inc 77.35 141127.14 TECH 14.93 12.22 3.02 (NYSE: DTE ) DTE Energy Co 64.53 14616.53 UTIL 15.4 16.95 3.59 (NYSE: VZ ) Verizon Communications Inc 59.72 192091.5 TELECOM 18.81 11.9 4.79 If you are a value investor, what is your approach for 2016? Scalper1 News

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