Performance
After 9 months of under performance, we may have reached a turning point.
The first graph shows the updated Undervalued (Long) screen's relative index compared to the overvalued (Short)*. They are shown relative to the CEV universe as it has outperformed the S&P by 24% over the period.
Since Sept '04, the annualized relative return has averaged +3.3 and -4.4% respectively for a spread of 7.6% (significantly more than the spread between the 25th and 75th percentile of US equity fund performance for comparable periods).
The last 2 months have shown a significant improvement in the Long performance. The same can be said for the Short lists which have leveled off.
This table shows the contribution by Sector and Industry to the December results alone.
A look at the current valuations below will provide a basis for deciding whether this is a significant turning point or not.
Absolute performance
In terms of absolute performance, the Long index gained 9.2% pa over the period vs 1.1% for the Short. $100 invested at the outset is now worth $207 vs $110. All returns exclude income.
* The undervalued are defined as 4th quartile in Valuation Return (VR) and 4th quartile in the EST/MPEPS ratio i.e where the estimate is higher than the normalized earnings used for the valuation. The overvalue are the opposite i.e. quartiles 1 & 1.
Current Valuations
This table summarizes the investment characteristics of the current (12/31/12) Long and Short lists. The undervalued are dominated by Industrial and Technology stocks. Both Sectors performed well in December. The biggest weighting in the overvalued list is in Consumer Cyclical stocks which also outperformed the market.
Other investment characteristics include:
1) the Undervalued have a significantly higher Reinvestment Return (RR- 13.9 vs 9.9),
2) Paybacks are much lower for the Undervalued and
3) the Market Cap is more than 4x the average of the Overvalued.
The stocks in the two lists are:
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