Friday, November 30, 2012

8 Years results from September 2004 to September 2012

Corequity has been conducting monthly valuation analysis of over 500 US equities since September 2004.  The resulting 8 year database has over 52,000 records each averaging over 40 variables.  A lot of progress has been made analyzing the data in the last few months using Excel PivotTables.   A brief review of performance and some initial analysis is presented below.


This graph shows the performance of the two screens for value, the Long and the Short lists as defined by the lowest and highest VR and E/M quartiles.  The Undervalued index outperforms the S&P 500 by 525 basis points per annum while the Overvalued does 262 points worse.   Adjusted for the fact that the Corequity universe averaged 209 bp pa better than the S&P, the spread is +316 vs -471 or +787 bp pa.

The last twelve months have been disappointing though.  A look at the individual screens over this period sheds some light on the market's preferences over this period.(See the preceding 10/2/12 comment looks at the Sector weightings of the screens. The focus here is on the investment characteristics.)

First, a look at the Undervalued Screens: they are selected on the basis of their 4th quartiles of Valuation Return/Risk and the ratio of the Estimated  vs Normalized earnings (E/M).  These stocks are the most undervalued using normalized earnings that are the lowest compared to their current estimate.

To view tables more easily click this link


The list is has a relatively high Reinvestment Return, moderately low Payback (PB) compared to their historical norm (NM) and reasonable growth projections as forecast by Value Line (last 5 columns).

The Overvalued list has the stocks which are most overvalued with estimated earnings that are lowest  compared to their normalized earnings.

The Overvalued show lower growth (RR), higher Payback and the Value Line growth statistics are only marginally better in two out of five measures.

  
The preference for the overvalued stocks looks like a huge bet on secular change in profitability at the expense of quality growth companies.

Robert L. Colby

Some background ...
In the late 1960s Robert co-founded Marcinvest Fund, a no load equity mutual fund in Canada. As manager, he developed a valuation methodology to ascertain whether street expectations were already discounted in the stock prices. In the early seventies Marcinvest was merged with Altimira Management and Robert continued as the sole equity manager.
In 1976, he moved to Boston to sell an institutional equity valuation service (under Colby Equity Valuations, Inc.). The valuation model was computerized in order to cover a large number of equities. Its primary goal is in identifying overvalued and undervalued equities.
The institutional clients who subscribed to the service included Allied Signal, Canadian Pacific, Canadian Broadcasting, General Electric, Ontario Hospital Association and Ontario Municipal Retirement System, Choate Hall & Stewart, Fidelity International, Fiduciary Trust Company, The First Church of Christ Scientist, Gardner & Preston Moss, Harvard Management Corporation, Jarislowsky Fraser, Massachusetts Financial Services, Thorne Ernst & Whinney, United Financial Management and Wellington Management. In addition, Robert was President of Manasset Corporation, a family office in Providence, RI. Mr. Colby’s equity valuation service was re-started over 7 years ago.
Robert Colby has had extensive corporate Board experience both as board member and officer of a number of for profit and non-profit organizations. A graduate of McGill University, he maintains residences in Dedham, Ma and Georgeville, Quebec.

Sunday, November 18, 2012

Volume 13 stocks




Each week we review the stocks that we cover in the current volume of Value Line.  This week is Volume 13 which covers computer, internet, financial services and banking stocks.



To access the actual file, click here

The the two most important measures are VR (Valuation Return/Risk) and E/M*.  VR is the projected percent price change given the current estimate and the historical relative valuation for the individual stock using Payback.  E/M is the ratio of Estimated Earnings to normalized Earnings or MPEPS.  It is important that undervalued stocks have a ratio of close to or over 1.0x and vice versa.

In addition, we have included the Implied Earnings (IEPS) and its derived Reinvestment Return (ImRR).  These are the numbers needed to be fairly valued and useful if you do not agree with the MPEPS number and its derived RR.

In this volume Microsoft and Yahoo stand out as attractive values.  Microsoft is undervalued by 29% if its current normalized earnings of 2.95 (2013) hold and grow at 16.4%.  It is fairly valued if its normalized earnings are 2.53 growing at 13.0%.

* In the 8 years ending in September of this year, the Undervalued screens (4th percentiles of VR and E/M or 4,4) out performed the Overvalued (1,1) by close to 800 basis points per annum real time.