For those of us with an eye for an bargain, London markets were a happy hunting ground during the first three months of 2012 – with the value hunting strategies of legendary investor Benjamin Graham proving to be the best way of finding them. Investors kicked off 2012 in bullish mood and the stimulating effects of international monetary policies that aimed to boost confidence certainly helped equities. The FTSE All-Share was up 5.1% while the FTSE 100 was up 3.5%. As part of Stockopedia PRO, we’re tracking 59 long guru stock screens spanning a range of value, growth, income and momentum strategies, in some cases for the first time publicly for the UK Market. As a shot in the arm for the quantitative investing school of thought, the average return of these screens was 11.41%, with 85% of them exceeding the FTSE All-Share!
As index valuations clawed back much of the ground lost during last year’s market collapse, a strong focus on buying underpriced companies looks to have been a winning formula so far this year. But can it continue?
Deep value wins out
While value hunters are not necessarily concerned with day to day market movements when it comes to tracking down underpriced shares, the effect of a rising market was nonetheless a bonus for value strategies in Q1. Graham’s Net Nets – which prioritises companies that are priced at less than their theoretical liquidation value – excelled over the first three months of this year, with a return of 35.7%. His slightly less extreme NCAV screen – which targets companies selling for less than the value of their net current assets – came in second, with a return of 26.3%.
As far as Graham’s screens go, deep-value means rummaging around for the few gems in a basket of stocks that might ordinarily set off alarm bells. One company that hits both the Net Net and NCAV screens is technology group Emblaze (LON:BLZ), which is an interesting stock because it qualifies for seven of the guru strategies and scores an impressive nine out of nine on the Piotroski F-Score of financial health (more on that shortly). Dig deeper and you’ll find a company that is currently proceeding with legal action for patent infringement against, wait for it… Apple (yes, that Apple), and a very large amount of cash on its balance sheet (£95m) relative to its £62.5m market price. No doubt further research is needed but on those figures alone, it’s clear why Emblaze turns heads.
On the subject of Piotroski, the F-Score Price-to-Book Value screen has been another top performer so far this year, delivering a return of 17.2%. When developing his demanding nine-point score, Piotroski, a US accounting professor, emphasised that when seeking out value stocks it is all too common to see some take off while others falter and fail. To overcome this, he took the cheapest price-to-book stocks and graded their financial health. One of those companies making it on to this screen is Finsbury Food (LON:FIF), the £14.7m market cap bakery business whose shares have started to creep up in 2012 after a couple of years of muted performance. Not only does the company achieve an F-Score of eight but it also qualifies for a host of other value screens, including a representation of the value strategy of Bill Miller, the Chairman and Chief Investment Officer of Legg Mason Capital Management, which itself delivered a return of 18.2% in the first quarter this year.
Another top performing strategy in the first quarter was one based on the approach taken by Robbie Burns, the blogger and author of The Naked Trader. This ‘growth at a reasonable price’ technique has delivered a 17.9% return over three months, and among the 37 companies on the list is one that also makes multiple appearances on Stockopedia screens. Home credit and motor finance group S and U (LON:SUS) earned a re-rating during February on financial results that were way ahead of expectations. Recent strength in S&U’s share price makes this a stock of equal interest to momentum investors and, unlikely for a potential value share, it also pays a dividend.
Finally, for those investors with an interest in dividends, it is worth noting that the Forecast Dogs of the FTSE 100 screen also sparkled during the first quarter. At Stockopedia, we are already big fans of a UK version of a dividend yield screen based on the “Dogs of the Dow” approach taken by Michael O’Higgins and John Downes in their book Beating the Dow. That focuses producing a 10-strong portfolio of stocks paying the best yields in the market and has returned 8.7% in three months. However, a twist on the approach uses the consensus forecast dividend yield, rather than the historic yield, and, as it turns out, this has performed even better, at 13.4% so maybe analyst forecasts have some predictive value after all. Unsurprisingly, all the FTSE 100 life assurers are on there, as is Vodafone (LON:VOD), the market’s top yielding stock. The winner on the forward yield front, however, looks to be Man (LON:EMG) with an impressive yield of almost 10%, assuming it can be sustained!
Will history repeat itself?
With value-based strategies proving to be a cash cow for investors during the first quarter of 2012, the question now is whether those approaches will sustain in the months ahead. While the ardent value investor doesn’t necessarily need to pay too much attention to macro factors in the search for underpriced stocks, investors in general will be keeping a close eye on the bigger picture this year. Unfortunately, many of the macro factors that caused such havoc in the latter part of 2011 haven’t really gone away. Sovereign debt, the strength of the US and Chinese economies, a double dip recession at home and rising tensions between the West and Iran all offer some cause for concern. A recent report by Schroders attempted to figure out whether the scene was set for history to repeat itself and for confidence to evaporate mid-year, as it did in 2011. For various reasons they think not. With the second quarter now under way, our list of top performing strategies has already seen some significant changes but value strategies are continuing to stake their claim as the best performers.
Filed Under: Value Investing,