Category Archives: Equity Valuation

Performance of Undervalued outperform Overvalued by 28.4% since June last year

In the last 9 months the Undervalued Screen has outperformed the S&P 500 by 21.2% while the Overvalued underperformed by -7.2%.  The absolute numbers were +33.8% vs +5.4%.

9 mos

Stay tuned for the a look at what Sectors, Industries and equities contributed to the divergent returns.

The graphs below show the performance of the two screens since inception on September 30th 2004.   Relative to the Corequity universe, the respective annualized returns are +2.68% pa vs -3.77% for a spread of over 600 basis points per annum.

The average return on the Universe is +2.04% pa which is more in line with the Equal Weighted S&P 500.

uvov graphs

Here is a look at the returns over the last year as well as since inception.

table

(c) 2017 Robert L. Colby

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November Results for Screens: Undervalued outperform S&P by 6.5% and 2.3% more than our universe’s average

Our universe of stocks outperformed the S&P by 4.2% last month while the  Undervalued Screen gained 6.5% relative.  The Overvalued were equal to the universe’s return of 4.2% mainly due to the superior performance of the Energy stocks which numbered 15 out of 26 in the screen.

The Overvalued ended the month on a strong note gaining 2.4% in the last week.

Changes and Updates to November Screens

There were huge gains and losses for those stocks entering or leaving the screens from October  31st to November 30th.
Those leaving the Undervalued averaged close to +14%.  Those leaving the Overvalued were down 7%.
The 7 stocks entering the Overvalued screen increased an average of 29% in the month, an astonishingly high number.  At the beginning of the month, they were fairly valued with an average of -1.8% and a range of -12 to +11%.

(c) 2016 Robert L. Colby

For the current Screens, contact robertlcolby@gmail.com

12 Years Results: Undervalued Screens outperform Overvalued by 5.5% per annum

An index for the monthly screens for value is created by linking the following months’ average returns, excluding income.  The Undervalued Screen index outperformed the S&P 500 by 395 basis points per annum while their counterparts, the Overvalued Screen index under-performed by the S&P by 158 basis points pa.  The spread between them was 552 basis points

The index for our universe of stocks increase by an 193 basis points pa so the performance relative to that standard was +198 and -344% basis points respectively.  The reason for the superior performance is most likely due to the unweighted universe vs the market weighted index.

10 Year Ranking among US Equity Funds*

To give an indication of how the returns on the Corequity Screens compared to managed accounts, we compared the 10 year returns to a universe of over 400 US equity funds as reported by the Globe & Mail for September 30th.  The Undervalued’s 10 year average was 8.51% vs 4.41% for the Overvalued.  The Undervalued would have ranked in the 90th percentile (1st quartile) while the Overvalued would have been in the 24th or 4th quartile.   Here the spread between them is 66 percentiles!
The index for our universe of stocks increase by an 193 basis points pa so the performance relative to that standard was +198 and -344% basis points respectively.  The reason for the superior performance is most likely due to the unweighted universe vs the market weighted index.

percentile-rank

* Globe & Mail US equity funds with 10 year records.

The Effects of ETF Cash Flows on Equity Values

My response by email to Mr. Zweig yesterday –
I have been convinced that the ETF funds exercise a significant influence on equity valuations and your recent column on low volatility stocks gave me an opportunity to prove it – to my satisfaction anyway.
The first graph is the dollar volume for the large ETF, iShares MSCI USA Minimum Volatility (USMV) showing a clear run-up that you described. (Yahoo Finance: Monthly, $ millions.)

zweig1.png

The chart below shows the relative strength of 50  of the larger stock holdings in the USMV. The index is the relative performance of these stocks compared to the average of our universe of close to 500 equities. It shows a gain of 25% from the low in the summer of 2014.

zweig2.png

Finally, this is the average Valuation Return/Risk (VR) of these stocks, again relative to our universe. From a high of +5%  in early 2014, the average Risk is now -15%. (VR is the projected price change between the current price and the price at which it would equal its inherent value)

zweig3.png
My theory is that purchasing ETFs does not involve valuation analysis as individual stock selection would and it appeals to Momentum buyers.  As such it becomes a source of inefficiency in equity pricing.
(c) 2016 Robert L. Colby