Outperform with Historical Low P/B Portfolios

Author's Avatar
Sep 12, 2014

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:

  1. The company must rank at least 4-star Business Predictability
  2. The company is traded at close to its lowest P/B ratio in the last 10 years.
  3. The companies are ranked by the % above its 52-week low prices. The smaller the percentage, the higher the rank
  4. Top 25 ranked companies are selected in the portfolio, equal weighted.
  5. 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.