Sunday, November 30, 2014

Performance of the Under and Overvalued screens since April & November Screens

Performance Update

This charts updates the longer  term performance of the Under and Overvalued screens.  There is some improvement in the Undervalued and a distinct deterioration in the Overvalued after more than 2 years of relative out-performance.  The following graph is a close up of the results since last April.

This shows the flat relative performance of the UV (+0.2%) screens vs a significant decline of -10.6% for the Overvalued.

Current Screens

The stocks are ranked by the  relative strength (to the S&P) last month.  At the top of the UV screen are undervalued stocks that did better than the market in November..  

Conversely at the top of the OV list are the Overvalued stocks that did poorly.

Changes in the screens last month

In general we would expect equities leaving the UV list to outperform the market and vice versa, which is largely the case as shown here as is the opposite case for the OV.
(c) 2014 Robert L. Colby

Wednesday, October 8, 2014

10 year results for Under and Overvalued Screens

September 30th 2014 marks the end of the 10th year of the monthly analysis of over 500 US equities.  Over all, the results have been good with the Undervalued list outperforming the S&P 500 by 4.72% per annum. The Overvalued under-performed the same index by 1.48% per annum.

Relative to Corequity’s universe, the Undervalued are 2.64% pa ahead while the Overvalued were behind by 3.56% pa for a spread of 6.20%.

In absolute terms, the Undervalued gained by 10.87 % pa while the Overvalued was up only 4.31%.  In the context of equity fund performance, this was the difference between the 99th percentile and the 39th for a spread of 60 percentiles in the ranking of over 300 US Equity funds tracked by the Globe & Mail for the 10 year period  ending in September. (All Corequity figures are based on price only)

Monday, February 3, 2014

January 31st Screens for Value

 Changes to the Undervalued list during last month

and the changes to the Overvalued screen were as follows


Tuesday, May 21, 2013

Volume 1

See below for examples of value in McKesson (long).

McKesson at $118 is undervalued by 35% in our analysis.  

The RoE chart above is used to normalize earnings which are estimated to be $8.41 in 2014.  Normalized earnings (MPEPS) are shown below vs actual earnings and dividends.

Using the normalized earnings, we calculate the history of relative Payback to the market, and, in McKesson's case, establish a normalized range of 90-130%.

Using this range we calculate the theoretical price range and compare that to the actual high low and close as shown here.

As mentioned, normalized earnings are $8.41 which gives a Reinvestment Return (growth) of 15.8%.   

Implied earnings (IEPS) and growth (ImRR). 

Reversing the process, we calculate the the stock is fairly priced if it earns normalized earnings of $7.12 and growth of 12.9%.

Monday, May 13, 2013

Wednesday, May 1, 2013

April 30th Screens for Value

The latest screens for good and bad values are shown below with the stocks distributed across their Sectors.  Below the April 30th screens are the corresponding screens from a month ago.  This will help in spotting changes in value which are a mainly a function of changes in price, or earnings.

A case in point is the reduction of Overvalued Technology stocks which was due mainly to substantially higher estimated earnings when 2014 was added.

Monday, April 22, 2013

Volume 8 - Financial, Basic Materials & Drug stocks

Two stocks stand out: one for being undervalued and having had relatively good performance over the last month and the other with the opposite characteristics.

On the long side, Actavis (ACT $98), the third largest generic drug maker in the world, looks attractive.  Estimated earnings and growth from reinvestment are $8.50 and 22% vs implied earnings of $7.21 and 18.8%.

On the short side is Forest Labs (FRX $36).  For March 2015, estimated earnings are $1.30, normalized earnings are $2.72 giving a growth rate of 9.7%.  The implied equivalents are $4.63 and 17%.

click here to open file

Robert L. Colby

Sunday, April 21, 2013

Volume 7

Due to poor performance in the Industrial and Technology Sectors and Industries, there are some great values in Volume 7.  

Thursday, April 4, 2013

Value Line Technical Rank - a near "perfect" predictor of stock performance

Our recent posting "Monetary stimulus favors poor quality equities" was a reminder of Value Line's Technical Rank and its near "perfect" record of predicting relative performance in the recovery since January '09.
The only imperfection is that it is in the exact opposite order to what one would want to see in a ranking system where 1 is the best and 5 the worst.

These results are based on the linked one month relative returns on the 500 plus stocks that we cover.  In addition to keeping our own monthly valuation data, we have kept some Value Line data on these stocks including their Timeliness, Safety and Technical Ranks.

Their definition of the Technical Rank is as follows:

The Value Line Technical Rank uses a proprietary formula to predict short-term (three to six month) future price returns relative to the Value Line universe. It is the result of an analysis which relates price trends of different durations for a stock during the past year to the relative price changes of the same stock over the succeeding three to six months. The Technical  rank is best used as a secondary investment criterion. We do not recommend that it replace the Performance rank. As with the other ranks, the Technical rank goes from 1 (Highest) to 5 (Lowest.)

The Value Line Timeliness ranking has a more mixed record.

Like the Technical description, there is no meaningful definition of what goes into the Timeliness equation.

Robert L. Colby

Wednesday, April 3, 2013

March 31st 2013 performance results

This graph shows the performance of the screens for value over the last 8 1/2 years.  The spread between the two had declined to 649 basis points per annum in favor of the Undervalued.

Relative to the S&P 500, the numbers are +5.4% and -1.1% pa.  Relative to our universe the numbers are +2.6 vs -3.9%.  In absolute terms, $100 is worth $221 vs $129.

The last quarter saw continued out performance by the Overvalued.  They averaged +6.4% vs -3.0% relative, or +16.4 to +7.0% in absolute terms.  All figures exclude income.

Robert L. Colby

Friday, March 29, 2013

Monetary stimulus favors poor quality equities

Mark Hulbert argues that the monetary easing since January 2009 has caused low quality stocks to outperform high quality stocks. This is illustrated in the first chart taken from his interesting article in the March 23rd Wall Street Journal.

Click here to read the WSJ article by Mark Hulbert, 3/23/13

Using Ford Equity Research data, he compared
the performance of the 20% lowest financial rated stocks to the highest. The 4 year gains are +273% vs +171% respectively, a very substantial divergence in favor of 'junk'.  I calculate the difference in performance to be +37.1 % per annum  vs +27.0%.
I would argue that the monetary easing more likely facilitated the rise in poorer quality stocks rather than causing it.

Core Equity Valuations has been keeping records of the valuation of over 500 equities monthly since September 2004.  In addition to our valuation data, we have also retained in our database some Value Line data included their Safety Rank. Using that as our measure of financial quality, we get very similar results as those based on the Ford data.
However, looking at the same two series in the years leading up the recession and the recession itself, we get a more complete picture.

Between the end of 2004 to October 2007, below average Safety Rank stocks outperformed the highest Safety.  However, from Oct '07 to Jan '09, something very dramatic occurs.  The lowest ranked stocks declined an average of 76% while the highest ranked  declined by only about 45%.

The next question to ask is: was the decline in low Safety stocks attributable to overvaluation in October '07?

The answer is not particularly.  Using Valuation Return/Risk (VR)*, the median was -4% for the lowest ranked and 0% for the highest ranked stocks at the start of the major downturn.

But after the decline, in Dec '08, those VR numbers are +73% and -17% respectively.  The former is an exceedingly high median number for any group of stocks, at any time.

Therefore, the conclusion is that the poorer quality stocks have done well in the recovery due primarily to their massive  undervaluation at the beginning. 

The monetary easing probably facilitated their recovery but it doesn't look like it caused it.

Finally the question is where are we today in terms of valuation.  The answer is pretty neutral.  The median VR for below average Safety Rank is +1% and +4% for the highest ranked.

Robert L. Colby

* Valuation Return/Risk is the price projection relative to the market based on the history of the each stock's history of relative valuation to the market and their return from growth and yield, both actual and projected.

Wednesday, March 20, 2013

Caterpillar, a good example of an undervalued Industrial stock

A good example of the undervalued Industrial Sector (see below) is Caterpillar (CAT $87) -

As with any cyclical company (and CAT is very), any useful valuation analysis will start with a calculation of what 'normalized' earnings are, based on past and estimated earnings.  The normalized earnings are calculated using the RoE without the benefit of future knowledge with the exception of including the estimated earnings.

This graph shows the EPS including estimates as well as the normalized MPEPS (green dots). This model discounts for cyclical change but cannot predict secular change.

This graph shows the history of CAT's relative Payback using normalized earnings.  In the last 25 years, CAT has traded between 75 and 125% of the market's Payback.

This graph shows the calculated price range vs the actual Hi Lo Close on an annual basis.  The projected price range for 2014 leaves the stock undervalued by  70%