Tag Archives: stocks

Value Investors: The Best Valuation Ratio May Not Be What You Think

The relevancy of 6 valuation ratios is evaluated in the S&P 500 universe on a 17-year period. The idea is to measure the performance of the 20% of stocks with the lowest price-to-something. Such filters may improve the total return, but sometimes degrade the risk-adjusted performance. Many seasoned investors use valuation fundamental factors as filters before going further in stock analysis. The most popular factor is certainly the Price/Earnings ratio. This article evaluates the relevancy of 6 valuation ratios available in most financial websites and in good stock screeners. The methodology is to compare the historical performance of the 20% stocks in the S&P 500 universe with the lowest valuation ratios. In every case, it is a set of 100 stocks, updated and rebalanced in equal weight every week to take into account the latest earnings reports, companies entering and exiting the index, M/A and liquidations. The period of comparison covers 2 market cycles: 1/2/1999 to 9/2/2015. SPY is usually taken as a benchmark for the S&P 500 universe, but for this study it is more accurate to take all S&P 500 companies in equal weight and rebalanced weekly, as for the 20% sets. For all the following simulations, dividends are accounted and reinvested. All S&P 500 stocks, equal-weighted rebalanced on weekly opening: (click to enlarge) This index returned 325% on the period, almost tripling SPY’s total return and doubling its annualized return. The excess return of our benchmark over capital-weighted SPY has two reasons: Size effect: lower-range large caps usually perform better than mega-caps. Weekly rebalancing: rebalancing frequently a big set of stocks is a kind of simplistic “buy-low-sell-high” strategy. Simplistic, but not stupid. This benchmark index is impossible to implement as a strategy for an individual investor because of the capital needed to absorb transaction costs. Moreover, there is an ETF for that: the Guggenheim S&P 500 Equal Weight ETF (NYSEARCA: RSP ). Since inception on 4/24/2003, it has an annualized excess return of 2.1% over SPY, making it a better instrument of passive index investing. On the same period, the annualized excess return of my benchmark index is 3.5%. The difference can be explained by trading costs, management fees, rebalancing frequencies. Now that the benchmark is defined, it’s time to examine the “best 20%” sets, ratio by ratio. 20% S&P 500 companies with the lowest P/E: (click to enlarge) 20% S&P 500 companies with the lowest Forward P/E: (click to enlarge) 20% S&P 500 companies with the lowest PEG: (click to enlarge) 20% S&P 500 companies with the lowest Price to Sales: (click to enlarge) 20% S&P 500 companies with the lowest Price to Book: (click to enlarge) 20% S&P 500 companies with the lowest Price to Free Cash Flow: (click to enlarge) Summary: Annualized Return % Max Drawdown % Benchmark 9.08 -59.29 20% lowest P/E 11.77 -64.14 20% lowest forward P/E 12.82 -69.43 20% lowest PEG 9.90 -63.63 20% lowest Price to Sales 11.94 -68.43 20% lowest Price to Book 9.12 -76.98 20% lowest Price to FCF 14.03 -67.65 Interpretation : Filtering the 20% lowest valuations using any ratio increases the return, but also the downward risk. The Price to Free Cash Flow gives the highest excess return and risk-adjusted performance (Sharpe and Sortino ratios). P/E, Forward P/E and Price to Sales also increase significantly the return and risk-adjusted performance. The Price to Book, used by a lot of investors to limit the downward risk, unexpectedly gives the highest downward risk when used alone. The excess return given by the Price-to-Book and PEG ratios, used alone, is very weak. For both of them, the Sharpe ratio is inferior to the benchmark. It doesn’t mean that PEG and Price to Book are bad ratios, just that they don’t work very well alone on the broad market. They may be more useful in combination with other factors, and they are more relevant in specific sectors like energy (this assumption is not justified here, maybe in a future article – some statistical evidence is in my book “The Lazy Fundamental Analyst”). The purpose of this article is not only to show the most useful valuation factors, but also to justify my choice of using the best 4 in my next series of articles. In this series I plan to give a valuation score of every sector in the GICS classification relative to its historical averages, and update it every month. I may also go deeper at the industry level in some cases. This series aims at improving the dashboard of investors who want a top-down vision of the S&P 500 universe and the stock market in general. If you are interested in the idea, you can click on the “follow” link at the top of the article, then tell me in a comment what you think and which other information specific to every sector’s fundamental status you would like to read in this series. Data and charts: portfolio123 Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I short the S&P 500 index for hedging purposes

Fund Liquidations: Neuberger Berman, KKM And RiverNorth

By DailyAlts Staff In this edition of Fund Liquidations, new filings and fund closures for: Neuberger Berman Global Thematic Opportunities Fund KKM Armor Fund RiverNorth Managed Volatility Fund Neuberger Berman Global Thematic Opportunities Fund (MUTF: NGHIX ) The Board of Trustees of Neuberger Berman Equity Funds approved the liquidation of the Neuberger Berman Global Thematic Opportunities Fund, and notified the Securities and Exchange Commission (“SEC”) in a July 13 filing . The fund ceased accepting investments from new investors or current shareholders on July 22 and offered to reimburse sales charges for shares purchased after June 25. The fund’s liquidation was expected to be completed by August 21. According to Bloomberg , the fund ceased trading on August 21 at a share price of $9.78, down 11.3% from a recent high of $11.03 on July 4. KKM Armor Fund (MUTF: RMRAX ) On August 24, KKM Financial filed a supplement with the SEC announcing the imminent termination of the KKM ARMOR Fund. The fund stopped accepting investments from new shareholders as of that date, announced it would abandon its investment objective in pursuit of its liquidation starting September 8, and set its termination for September 24. KKM also terminated its sub-advisory agreement with Equity Armor Investments. The KKM ARMOR Fund, which debuted in 2011, returned a whopping 45.52% in August but was still down 29.99% over the prior 12 months. Its strategy, which involves long and short calls and puts on the S&P 500, as well as futures contracts on the VIX and other volatility bets, was extraordinarily volatile itself, with one-month returns ranging from -31.78% in February to +45.52% in August, according to data retrieved from Morningstar. RiverNorth Managed Volatility Fund (MUTF: RNBWX ) At a July 29 meeting of RiverNorth Funds’ Board of Trustees, the decision was made to close and liquidate the RiverNorth Managed Volatility Fund. According to an SEC filing , the fund stopped accepting new investments as of that day and abandoned its investment objective in pursuit of its liquidation, which was expected to conclude by August 7. According to Bloomberg , the fund closed at $9.13 on that date, down more than 11% for the year. Share this article with a colleague

3 Things I Think I Think – Crashing Up And Down Edition

Here are some things I think I am thinking about recently: 1) What a boring year! The Global Financial Asset Portfolio is down about 1.2% year to date. This might come as a shock to people who are glued to financial TV all day and think of the “market” as the stock market. Yes, some stock markets are down quite a bit, but the aggregate “markets” really haven’t budged much. And this goes to show how damaging it can be to constantly be obsessing over the daily moves of your investments. (click to enlarge) More importantly, it shows how crucial it is to remain diversified and to avoid paying too much attention to the media’s infatuation with every minute-by-minute move in the stock market. Stocks are an important, but relatively minor slice of an aggregate portfolio. Odds are, if the stock market’s daily moves are driving you mad, you have misinterpreted your personal risk profile and might need a change… 2) The S&P 500 (NYSEARCA: SPY ) has value because of people like Donald Trump. I notice a lot of Donald Trump wealth bashing in the media. This story usually goes something like this – “Donald Trump isn’t nearly as wealthy as he claims”, or “Donald Trump is only rich because his daddy was rich”. These statements might be true to some degree. But there’s a good bit of hyperbole going on here. For instance, take this piece in VOX today claiming that Trump would have been better off if he’d just invested his inheritance in an index fund. The author writes: ” Trump is one of five siblings, making his stake at that time worth about $40 million. If someone were to invest $40 million in a S&P 500 index in August 1974, reinvest all dividends, not cash out and have to pay capital gains, and pay nothing in investment fees, he’d wind up with about $3.4 billion come August 2015. ” This is unreasonable on so many levels. First, Trump probably didn’t inherit a lump sum of cash. He probably inherited part of the family business, real estate and many other assets valued at $40 million. Second, NO ONE just invests their whole net worth in a zero-fee, zero-tax, zero-withdrawal all-stock portfolio and lets it ride. So, the assumptions here are totally unfair and reflect nothing more than a fiction. But let’s go further and apply something somewhat realistic. Let’s assume Trump had decided to be a “fat loser” (his words, not mine) and just let his daddy’s inheritance ride in the S&P, while spending a small portion of his net worth each year. For instance, if he’d withdrawn 5% of his portfolio per year so he could do nothing all day every day, he’d have compounded his S&P 500 portfolio into about $400,000,000 as of August 2015. Not bad, but well below the misleading billions that many assume. And keep in mind, that’s before taxes and fees. He’d likely have less than half that if he’d been paying taxes and fees every year. The more important point is that Trump inherited a lot of money and DID SOMETHING with it. He didn’t just turn into a slacker, like a lot of people do when they inherit money. He took a successful company and built it into something bigger and better. And that very production is why index funds have any value in the first place. The S&P 500 doesn’t just rise because some slacker waves a magic wand at higher prices. It rises over time because people like Donald Trump work their butts off to make companies more valuable. I find myself in a weird position here, because I think Trump has said a lot of awful things about people recently. So, there’s no denying he’s been rude to a lot of people and could benefit from a bit more humility. But people who try to make Trump out to be some rich, lazy slacker are barking up the wrong tree. 3) Stop the currency hedging madness! Vanguard has a wonderful piece of research out on currency hedging (see here ). Their conclusion – it’s just more fees cloaked in complexity. They conclude: ” For us, hedging equity exposure isn’t worth the added costs in those strategies that still have considerably less than half their assets in international equities and that have broader investment objectives than controlling volatility. ” This makes a lot of sense to me. If you’re using a passive long-term vehicle like an index fund, then why would you layer on a short-term, zero-sum trading vehicle on top of it? This is a total contradiction of strategies! Low fee indexing and currency hedging are not synonymous. After all, when you hedge currencies, you are essentially timing a zero-sum relative market. Over long periods of time, we should expect that currencies will generate a negative real return because they are zero-sum relative markets. It makes no sense to layer on a currency hedge if you’re adhering to a low-fee indexing strategy. I’ve noticed a lot of these currency hedging products coming on the market lately. They’re very likely just high-fee versions of index funds that come with a slick marketing campaign and little more.