Stocks that Could Appeal to the Value Investor

In a recent article for The Globe and Mail, Validea CEO John Reese discusses the hefty divergence between growth and value stock performance so far this year and offers insights as to the various factors at play. He references the current market’s stretched valuations, noting that “it may be hard to see value” given that the market multiple is above its historical average. “But remember,” he argues, “a big driver of that is the overweighting and outperformance of a handful of big tech stocks.” Reese suggests that investors with a long-term view might consider “strategically shifting, or tilting, some of […]

Value Investors Must Accept Stretches of Underperformance

Even though value investors have seen lackluster performance over the past ten years, panelists at a last month’s Morningstar Investment Conference argue this isn’t an indication that this approach is “dead.” This according to an article in Financial Advisor. AQR’s Ronen Israel commented that a value strategy is good over the long term, but an investor will have to accept periods of underperformance. “Ten years,” he said, “isn’t enough time to judge it.” Jared Watts, a portfolio manager at Morningstar, said that while the value premium exists, it can elude investors, the article says. Both Israel and Watts argued that […]

It Might Be Time to Cool Off on Value Stocks

The value stock-trade is getting crowded, according to an article in this week’s WSJ, with some analysts saying they have been “picked over like never before.” The article cites a research report by strategists at Sanford Bernstein & Co. that says, “Sentiment towards value stocks has reached levels rarely seen before, with analysts upgrading value names faster than they have ever done in the past 30 years.” This, says the article, could lead to a disproportionate downturn for the group in the next market sell-off.   President Trump’s unexpected victory was a boost to value stocks, the article asserts, and […]

Value Stock Picks in an Elevated Market

Although today’s market is a bit pricey, it still offers some values if you shop around and properly evaluate a company’s operations and financials. This according to Validea CEO in a recent article for TheStreet. The article underscores the investment mantra of Warren Buffett–“It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price” – as well as the strategy of the late, great Benjamin Graham that focuses on stocks with a high “margin of safety” between the stock price and a company’s intrinsic value. Reese identifies the following value […]

Contrarian Picks Based on David Dreman’s Philosophy

The famous investor David Dreman, who Kiplinger once referred to as the “consummate contrarian”, follows a strategy which capitalizes on the emotional, knee-jerk reactions that make unpopular stocks underpriced, writes Validea CEO John Reese in TheStreet. This is no coincidence, given Dreman’s knowledge and experience in the area of behavioral finance. Dreman identifies such undervalued companies, Reese explains, by comparing their share prices to four different financial variables that gauge the strength of the underlying business: earnings, cash flow, book value and dividend yield. Reese describes the findings of studies conducted by Dreman from 1970 to 1996 and elaborates on […]

On Becoming Warren Buffett and Some Fat-Pitch Picks

As explained by the legend himself in the recent HBO documentary “Becoming Warren Buffett”, the Oracle of Omaha stays within what he calls his “Circle of Competence” when investing. This according to a recent Forbes article by Validea CEO John Reese. This includes, writes Reese, “knowing what you know, and steering clear of what you don’t.” He quotes a comment Buffett offers in the film: “Having an edge is enormously important. With that, however, comes the onus of brushing off that which fails to serve you.” Reese recounts other anecdotes and quotes from the film that reinforce what we already […]

Warren Buffett on “Free Money ” Plus Four Picks

In one of his many interviews, Warren Buffett explained how the insurance industry offers the opportunity to “invest in other people’s money and keep all the earnings on those investments,” writes Validea CEO John Reese in TheStreet. The article discusses the evolution of Buffett’s penchant for the insurance business as well as the industry outlook. Using his guru-based stock screening models, Reese identifies four high-scoring, small-cap financial picks: INTL FCStone (INTL), a financial services company (market cap of $687 million) that provides advisory services and products, earns high marks for its price-sales ratio and relative strength (price performance compared to […]

Three Picks that Benjamin Graham Would Approve

The difference between a company’s actual value (net working capital minus debt) and the value at which its shares sell in the market describes what Benjamin Graham called the “margin of safety.” In a recent article for The Globe and Mail, Validea CEO John Reese offers insights regarding the metric and findings of research concerning its credibility. The article cites Warren Buffett’s explanation of the margin of safety: “You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you […]

Top Stock Picker Follows Graham and Dodd

“For the second consecutive year, the top stock picker is a practitioner of the valuation model introduced in the 1930s by Columbia University professors Benjamin Graham and David Dodd,” writes Bloomberg’s Matthew Winkler. That stock picker is J. David Wagner, vice president of Baltimore-based T. Rowe Price Group and manager of the T. Rowe Price Small-Cap Value Fund, which returned 30 percent last year (more than double that of the S&P 500): Winkler writes, “Wagner’s winning strategy depended on identifying companies too small for most analysts to acknowledge.” Wagner’s model, he says, considers earnings, dividends, cash flow and book value […]

Greenblatt’s Magic Formula-Worthy Picks

Most investors lack patience and don’t understand underperformance, which motivates them to abandon funds when performance dips—precisely the time they shouldn’t, says Joel Greenblatt, co-founder of Gotham Asset Management. In a recent Forbes article, Validea CEO John Reese explains the fundamentals of Greenblatt’s “Magic Formula,” which uses return-on-capital and earnings yield to identify good companies selling for bargain prices. Reese identified the top ten Magic Formula picks and, including the following four that also earn high marks from other guru strategies: Natural Health Trends (NHTC) is a direct-selling and e-commerce company that sells personal care, wellness and quality-of-life products. In […]

A Contrarian View May Be in Order

The seven-year-old bull market that started in the aftermath of the financial crisis could be facing a shift over the next five years, says Validea CEO John Reese in last week’s Globe and Mail. Reese suggests that such a shift could include a resurgence of emerging markets and trends favoring cyclical, value and small cap stocks over defensive, growth and large cap names. “Investors appear to be betting that economic growth has the potential to come in better than expected in the near term, because cyclical companies are sensitive to economic growth trends.” “Perhaps,” he says, “investors have grown wary […]

Benjamin Graham Inspired Picks

In his book The Intelligent Investor, the “Father of Value Investing” (and Warren Buffett’s mentor) drives home the importance of evaluating a business’s fundamentals before investing. In a recent article for Forbes, Validea CEO John Reese explains the metrics he used  to create his Graham-inspired stock screening model and offers the following high-scoring picks: Genesco (GCO) is a retailer and wholesaler of footwear, apparel and accessories that earns high marks for its solid revenue base, liquidity and low leverage. Long-term growth in earnings-per-share well exceeds the minimum requirement under this model. Myriad Genetics (MYGN) is engaged in the discovery, development […]

Investing Principles Part II: Identifying Value in Earnings

This section of the Tweedy Browne publication What Has Worked In Investing referenced in yesterday’s blog describes the investment approach related to low price in relation to earnings. Legendary value investor Benjamin Graham’s focused on what he called the “margin of safety” (the difference between a stock’s price and the company’s underlying value) and gravitated toward stocks that had price-earnings ratios below 15. The Tweedy publication references a study that tested Graham’s criteria on stocks listed on the NYSE-AMEX index (between 1974 and 1981). Results show that an investor who employed Graham’s criteria during this period achieved a mean annual […]

Investing Principles Part I: Identifying Value based on Assets

This describes the first investment approach outlined in the Tweedy Browne Company publication entitled What Has Worked In Investing referenced in yesterday’s blog post. The net current assets approach was developed and tested by Benjamin Graham between 1930 and 1932 and is described by Tweedy as the “oldest approach to investment in groups of securities with common selection characteristics of which we are aware.”  The technique involves identifying and purchasing those stocks which are “priced at 66% or less of a company’s underlying current assets net of all liabilities.” This strategy was subsequently examined by a professor at the State University […]

Investing Principles: What Has Worked

For the next several weeks, our daily blogs will include information from a 1992 publication by the investment firm Tweedy, Browne Company LLC entitled What Has Worked in Investing: Studies of Investment Approaches and Characteristics Associated with Exceptional Returns. The booklet includes data from over fifty studies of share performance woven together with insights based on the firm’s five plus decades of industry experience as to which stock characteristics have provided the best returns over time. Our blogs will provide synopses of various sections of the booklet, which Tweedy says provides “empirical evidence that Benjamin Graham’s principles of investing, first […]