The chart below shows the performance of the Undervalued and Overvalued screens relative to our universe of approximately 500 equities. The Undervalued are comprised of the top quartile of both the Valuation Return (VR) and the Estimate/Normalized Earnings (EST/MPEPS or E/M).
(Click here to learn about valuation model and terms used)
Since inception in 2004, the Undervalued have outperformed the universe by 2.30 % points pa while the Overvalued under-performed by 3.23 % for a spread of 5.53% pa*.
Undervalued (88-103)This table shows the undervalued stocks which were screened in months 88-103. The column on the right shows the cumulative Relative Strength to the S&P that the individual stocks contributed over the 15 month period. The worst 6 equities, 12% of the total number, account for 84% of the decline of 18% relative.
Looking at the performance by Sectors, Basic Materials is overweighted and is also had the worst performance. Technology has an equal weighting but is also a major contributor.
Looking at the individual stocks, a common characteristic is the secular (vs cyclical) decline in the estimated earnings in the months following being screened. Where this occurs, it shows up as a decline of the normalized earnings (MPEPS - red line). The following individual equity graphs show the Estimated earnings (EST), normalized earnings (MPEPS) and the implied earnings (IEPS). The green bars indicate the months that the equity was screened.
CAT is an exception in that there is little decline in the normalized earnings suggesting the decline in estimates was more cyclical. The majority suffered a secular decline in earnings.
Overvalued (83-112)The superior performance of the Overvalued screens in months 83-112 somewhat overlaps but has a substantial positive median return. Here the median cumulative Relative Strength of all stocks screened is +5.7%, or an average of 0.74% per month.
The top and bottom screened equities by total Relative Strength are shown here (the file below is complete)
Click here to open file
Sector weighting and performance is shown here and it is clear that Consumer Cyclicals had a lot to do with the positive performance of the Overvalued screens. They had twice the weighting and strongly positive relative strength.
In this instance, the majority of these stocks benefited from expectations that failed to materialize, some of which persists to the present.
* The Universe did 2.18% pa better than the S&P 500, very similar to an unweighted S&P 500 return.