Factor Investing: Focus on Value

July 28, 2020    Portfolio Idea Value

One year after selecting a number of undervalued companies, it’s time to look back. Is this a strategy worth pursuing?

The Results

Symbol Name Percentage
SDLPF Seadrill Partners LLC -82.1%
VVPS.VI Volksbank Vorarlberg e. Gen. -45.45%
SWN Southwestern Energy Co. 27.75%
XIN Xinyuan Real Estate Co. Ltd. -43.48%
GPOR Gulfport Energy Corp. -66.77%
CRZO Carrizo Oil & Gas, Inc. -76.19%
DNR Denbury Resources, Inc. -77.67%
IRS IRSA Inversiones y Representaciones SA -58.76%
AR Antero Resources Corp. -30.94%
RZA Reinsurance Group of America, Inc. -4.3%
  Total -45.791%

I think it would be an understatement to say that the portfolio did not do well. It wasn’t a good year for shares in general, but many have already recovered from their March/April crash. Some of the shares in the portfolio did recover, but they were already on a downward trend.

In hindsight, I already predicted that a backtest of this selection criteria was not very promising.

Note that Carrizo Oil & Gas merged with Callon (CPE). Shareholders received 1.75 shares CPE in return for one share CRZO.

Value

In spite of the performance, I’m choosing to believe in value investing for one more year.

I’m also sticking with the same ratios:

  • P/E or price-earnings ratio: The lower this is, the more this company is earning and the more earnings you’ll get for the same price.
  • P/B or price to book value: The book value is what value you’d get if you liquidated all the company’s assets right now. As in the previous ratio, the lower this is, the cheaper you can buy the company.

This Month’s Portfolio

With that in mind, here are the criteria for this month’s selection:

  • I’m using the Finviz screener, which means all companies are on the major US exchanges.
  • Sort by P/E, lowest first.
  • P/B under 1.
  • I double checked the numbers via IEX Cloud and sampled various other investing sites, because some of the Finviz data did not appear to be reliable.
Symbol Name Current price
IHRT iHeartMedia, Inc. 8.27
DNR Denbury Resources, Inc. 0.23
DAC Danaos Corp. 3.6
SBOW SilverBow Resources, Inc. 3.91
EDN Edenor SA 4.21
BHF Brighthouse Financial, Inc. 28.85
PVAC Penn Virginia Corp. 11.35
DXYN The Dixie Group, Inc. 0.88
NOG Northern Oil & Gas, Inc. 0.81
FLY FLY Leasing Ltd. 6.74

There are some penny stocks in there, which means there’s significant risk. We’ll see next year.


My philosophy: If you want to invest and your goal is to try to beat the market, you need a system. You need a system that can decide for you what to buy, when to sell and not to panic when things go down. Everything starts with selecting stock. You should not just select random stock here and there based on whims or things you read. No, create a system that suites your style and follow it. These posts give you example of what such a stock selection could look like.

Disclaimer: Don't believe anything I say or write. Always do your own research before making any investment decisions.