Wednesday, June 24, 2015
Value has been driving the equity market for a while now. The Undervalued are comprised of the top quartile of both the Valuation Return (VR) and the Estimate/Normalized Earnings (EST/MPEPS or E/M or 4,4). They are in a positive trend of +4.3% pa, relative to the S&P 500, while the Overvalued's (1,1) downtrend is 3.9% pa for a spread of 8.2%. The spread is even higher using the Universe as the standard.
In May, the UV stocks were up 4.5% while the OV declined 1.1% for a spread of 5.6% in one month.
So far in June (to June 24th intra-day), there has been a reaction to last month's gains and the Overvalued are up 2.5% relative to the market. The Undervalued are down fractionally.
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Monday, May 11, 2015
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*.
However, there are three anomalous periods where investing in value bore a cost. The first is the sub-par performance of the Undervalued from May 2008 to December 2008 (months 43 to 50). The second, also affecting the Undervalued, started in January 2012 and lasted until April 2013 (months 88 to 103). Finally, the third anomaly is the superior performance of the Overvalued which took place between September 2011 and February 2014 (83-112).The following is an analysis of the causes of the two most recent periods of sup-par performance.
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.
The column on the right above is shown in the graph below. It illustrates that relatively few stocks accounted for the poor performance. This is also shown by the median of all of the cumulative relative returns which is close to zero.
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.
As it turns out, there was (and is) a huge bet on Home Building and Building Supplies.
Examples of the top contributors are:
KBH's estimates do rise to the level of Implied Earnings. This is the only one where the earnings estimates rose to the level of implied earnings when screened although normalized earnings remains well below implied.
LEN has rising earnings estimates but implied earnings remain well above.
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.
Tuesday, February 17, 2015
Qualcomm is significantly undervalued !Last week's announcement that QCOM and China's National Development and Reform Commission had reached a resolution eliminated one of the problems depressing this stock. Click here
This highly rated technology company is cheap at 13.5x earnings and a yield of 2.3% !
Our first graph shows the Return on Equity over the last 20 years (using non-GAAP earnings and estimates). This shows a healthy level of profitability of around 20% over the last 10 years..
During this period the valuation of the stock shows a pronounced secular decline as measured by its Relative Payback.
The current Relative Payback is 70%. Using a conservative relative valuation range of 75-120% of the market's Payback, the projected price range is $73 to $161. A neutral valuation would be reached 57% above the current price.
Given that there maybe other uncertainties concerning any equity, we calculate the break-even earnings on the stock price. In Qualcomm's case, the implied earnings (IEPS) for 2015 are $4.25 vs the non-GAAP estimate of $5.25. The implied earnings would generate a growth rate of 11.4% vs the current Reinvestment Return (RR) of 16.4%. These compare to the historical rate of growth of 16.7% (2000-2015) and consensus expectations for long term growth of 14.2%.
This chart shows an index of the stock over the last 6 months together with its Relative
Strength compared to the S&P 500. The latter is a 5 day moving averaged which turned up on February 4th.
Robert L. Colby
Monday, January 19, 2015
N.B. Performance spread between UV and OV screens since inception (Sept 2004) is +5.90% pa
The first table summarizes the changes in the screens that occurred in the last two weeks
As you can see the Undervalued stocks that left the screen had relative performance of +6.65% while the two leaving the Overvalued declined an average of 6.16% relative.
Current undervalued list
Since starting the monthly screens Sept 2004, these stocks have outperformed the S&P by 4.66 pa or 2.46% better than our universe.
The same stocks organized by Sector
As is evident, the UV list has a major weighting in Energy which may remain a liability for a while.
Current Overvalued List
Since inception (Sept 2004) this monthly screen has underperformed the S&P by -1.27 % or -3.44% vs our universe of over 500 equities.
The same stocks by Sector
Here we see a big weighting in Consumer Cyclicals (see Home Building comment)
The S&P 500 was off 2% in the first 2 weeks of the year. The Overvalued Screen outperformed the market by 0.52% while the Undervalued was off 1.06% relative. Utilities (+6.78% rel.) largely accounted for the OV positive results and the Energy Sector hurt the Undervalued.
Friday, January 9, 2015
The Undervalued screens performed in line with our universe of stocks which were down 3.7% relative to the S&P 500. The Overvalued Screens, on the other hand, did quite a bit worse: -13.5% relative to the Universe or -17.1% relative to the S&P.
This chart shows the performance of the indices of the monthly screens for value (UV - Undervalued and OV - Overvalued). The table below gives the indices of relative performance and the spreads.
In absolute terms, the changes in market value were +7.25% for the UV and -7.12% for the Overvalued excluding income. The spread was 14% in favor of the UV.
(c) 2015 Robert L. Colby
Friday, December 5, 2014
In April 2013 we noted that the Value Line Technical Rank seemed to have an inverse relationship with performance
The perverse performance continues with the best ranked doing the worst and vice versa.
(c) 2014 Robert L. Colby
Sunday, November 30, 2014
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.
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
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)