The value strategies of investing in predictable companies traded at historical low price/sales (P/S) and price/book (P/B) ratios worked extremely well this year. These strategies have outperformed the broad market by wide margins. As of yesterday, both the strategies have gained more than 15%, doubling the performance of S&P 500 index.
Among these two strategies, the portfolio of historical low P/B ratios has shown extremely consistent outperformance. Since inception in 2010, the portfolio outperformed in 4 out of the last 5 years. In 2011, when the market was flat, the portfolio underperformed by less than 2%. Over the last five years, it outperformed 26%, cumulatively, which translates into more than 3% of outperformance a year.
This is the annual performance of the portfolio:
Year | S&P 500 | Historical Low P/B |
2010 | 11.65% | 16.39% |
2011 | -0% | -1.87% |
2012 | 12.1% | 16.45% |
2013 | 31.8% | 33.18% |
2014 | 7.58% | 15.06% |
Cumulative | 77.46% | 103.81% |
This is how the portfolio is constructed:
- The company must rank at least 4-star Business Predictability
- The company is traded at close to its lowest P/B ratio in the last 10 years.
- The companies are ranked by the % above its 52-week low prices. The smaller the percentage, the higher the rank
- Top 25 ranked companies are selected in the portfolio, equal weighted.
- Rebalance once a year.
We are not surprised by the outperformance of the historical low P/B ratio portfolio. As found in our previous research, stock prices are highly correlated with the book value of the company shares. The companies with high business predictability can usually grow their book value consistently. If we buy the stock at historical low P/B ratio, over time, the P/B ratio tends to revert to the mean.
As a matter of fact, Ben Graham, the father of value investing, considered book value the most important factor in his valuation of stocks.
This is the detailed performance of the low P/B portfolio:
Symbol | Company | # of Shares | Bought on | Share Cost | Current Price | YTD Change | Overall Change | Value ($) |
---|---|---|---|---|---|---|---|---|
Cash | Cash | 173.43 | 01/02/2010 | 1 | 1 | 0 | 173.43 | Â |
STRA | Strayer Education Inc | 211 | 01/01/2014 | $34.47 | 60.30 | +74.93% | +74.93% | 12,723 |
EW | Edwards Lifesciences Corp | 111 | 01/01/2014 | $65.76 | 101.18 | +53.86% | +53.86% | 11,231 |
IDCC | InterDigital Inc | 247 | 01/01/2014 | $29.52 | 43.50 | +48.86% | +47.36% | 10,745 |
LGTHF | Leighton Holdings Ltd | 532 | 01/01/2014 | $13.7 | 19.27 | +42.63% | +40.66% | 10,252 |
HNP | Huaneng Power International Inc | 201 | 01/01/2014 | $36.25 | 49.21 | +41.76% | +35.75% | 9,891 |
TEVJF | Teva Pharmaceutical Industries Ltd | 180 | 01/01/2014 | $40.35 | 53.95 | +35.93% | +33.71% | 9,711 |
SAPIF | Saputo Inc | 159 | 01/01/2014 | $45.78 | 61.02 | +34.73% | +33.29% | 9,702 |
LH | Laboratory Corp of America Hldgs | 64 | 01/01/2013 | $86.62 | 107.27 | +17.40% | +23.84% | 6,865 |
GOLD | Randgold Resources Ltd | 116 | 01/01/2014 | $62.81 | 76.65 | +22.80% | +22.03% | 8,891 |
RGORF | Randgold Resources Ltd | 116 | 01/01/2014 | $62.75 | 76.10 | +22.07% | +21.27% | 8,828 |
JMHLY | Jardine Matheson Holdings Ltd | 138 | 01/01/2014 | $52.81 | 62.33 | +20.52% | +18.03% | 8,602 |
GG | Goldcorp Inc | 336 | 01/01/2014 | $21.67 | 25.41 | +19.10% | +17.26% | 8,538 |
CSH | Cash America International Inc | 190 | 01/01/2014 | $38.3 | 44.03 | +15.23% | +14.96% | 8,366 |
CXW | Corrections Corp of America | 227 | 01/01/2014 | $32.07 | 35.63 | +14.28% | +11.1% | 8,088 |
ALTR | Altera Corp | 224 | 01/01/2014 | $32.51 | 35.90 | +11.90% | +10.43% | 8,042 |
DFIHY | Dairy Farm International Holdings Ltd | 153 | 01/01/2014 | $47.43 | 51.41 | +10.63% | +8.39% | 7,866 |
WARFY | Wharf holdings | 478 | 01/01/2014 | $15.24 | 15.82 | +6.46% | +3.81% | 7,562 |
RIOCF | Riocan Real Estate Investment Trust | 313 | 01/01/2014 | $23.28 | 24.09 | +7.16% | +3.48% | 7,540 |
HWKN | Hawkins Inc | 196 | 01/01/2014 | $37.19 | 37.60 | +2.07% | +1.1% | 7,370 |
IBM | International Business Machines Corp | 29 | 01/01/2013 | $191.55 | 191.72 | +3.89% | +0.09% | 5,560 |
SHZNY | Shenzhen Expressway Co Ltd | 367 | 01/01/2014 | $19.85 | 19.85 | +6.99% | 0% | 7,285 |
TGT | Target Corp | 115 | 01/01/2014 | $63.27 | 62.59 | +1.11% | -1.07% | 7,198 |
CCU | United Breweries Co Inc | 302 | 01/01/2014 | $24.11 | 22.36 | -6.30% | -7.26% | 6,753 |
RCII | Rent-A-Center Inc | 218 | 01/01/2014 | $33.34 | 28.89 | -11.97% | -13.35% | 6,298 |
CCLAY | Coca-Cola Amatil Ltd | 340 | 01/01/2014 | $21.4 | 8.28 | -18.45% | -61.31% | 2,815 |
Total Market Value: $206,571; Cost: $100,000; Change: 106.57% | Â |
We can see that the stocks in the portfolio show broad gains. Out of the 25 stocks, only three are down this year. The worst performers, Rent-a-Center (RCII, Financial) and Coca-Cola Amatil (CCLAY), are down less than 20%, while five stocks achieved gains of more than 40%.
You can see the current list of stocks traded at historical low P/B ratio here. This screen is for Premium Members only. If you are not a Premium Member, we invite you for a 7-day Free Trial.