Where are the Cheap High Quality Value Stocks?

Where are the Cheap High Quality Value Stocks?

May 20, 2015 Tactical Asset Allocation Research
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(Last Updated On: June 1, 2017)

Here is a snapshot of a model portfolio built on the Quantitative Value philosophy. Note: we exclude financials in our analysis, so by construction they have a 0% allocation

  • May 2017 Update on sector allocations
    • Consumer discretionary and healthcare dominate the cheap stock landscape. Amazon is projected to kill a lot of things!
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.
  • Current allocations:
    • Technology, consumer discretionary, and industrials are overweight relative to 3 months prior
indtoday
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.
  • Allocations 3 months ago (February)
    • This February, energy was the cheapest sector…oil shock!
indfeb
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.


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Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.


Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Michael Milburn

    Wes, just wanted to say thanks for all the ideas and information you post here. I looked through the list of stocks and can tell from the portfolio what you’ve posted has influenced me heavily. I’m invested in 6 of the companies on the list and am familiar with most (not all).

    It’s interesting to me that consumer discretionary is such a large piece of the pie. I noticed a lot of retailers bubbling to the top in a ranking of value and quality (BIG, DDS, BBBY, FL, GPS, HIBB, GME, maybe OUTR counts ….), but in general tend to be uncomfortable with those types of value stocks as they’ve tended to burn me in the past. I understand from your approach it seems you are sector agnostic, but wonder if you’ve considered underweighting or eliminating some sectors? Maybe it’s just been my bad experience in retail, but wonder if you’ve had similar experience, thoughts?

  • jimhsu

    Any reasonable way to “value” financials? Obviously, they have outperformed handily during certain phases of the market (2003-2007 rings a bell) so completely excluding them doesn’t seem to be ideal. However, the conventional value metrics don’t seem to work.

  • Steve

    Actually if you have a look at the “Sectors” chapter of Jim O’Shaughnessy’s, “What Works on Wall Street” (4th edition), you’ll see that all of the ‘traditional’ value metrics work well, including in the sector(s) that you often see excluded when using Enterprise Value metrics (such as EV/EBITDA) – Financials, (and sometimes Utilities).
    That’s looking at things from an intra-industry basis. When ranking a multi-sector universe on an enterprise multiple, you theoretically won’t get any/many financials rising to the top.

  • Jack Vogel, PhD

    We eliminate financials as in the 2nd step of the QV process, we eliminate firms who look like they may go bankrupt. Compared to other operating companies, most financials looks like they are going bankrupt due to their leverage.

  • Jack Vogel, PhD

    We follow the model. Most firms become cheap for a reason!

  • Chris

    got the charts for International stocks?

  • Jack Vogel, PhD
  • dph

    Have you guys tested overweighting, or even equal weighting, the leaders exclusively (top 3-5 classes assuming a double digit share) beyond the percentages suggested in the pie chart ?

  • jimhsu

    The same for momentum? It’s telling when I open up the momentum screen in your tools and see not a single company in the top 10 that isn’t a pharma/biotech. That seems like … a lot of concentration risk to take.

  • Jack Vogel, PhD

    I agree sometimes one sector is overweight. We prefer to follow the model.

  • Jack Vogel, PhD

    We have not tried that — not sure what the results would look like.

  • Ryan

    Hi guys,

    Read the book and am thoroughly impressed with your investment process. As noted in the comments below, I also am curious about selecting financial stocks. Is there a “quantitative value” approach that can be used to separate magic formula-type financial stocks from the rest of the sector?

    Also, I note that in the book you often compare your performance to the S&P 500. This analysis is a bit muddied by the fact that you completely disregard financials and REITs. Have you compared the historical performance of QVAL to the S&P 500 Index ex Financials and REITs? This would be a better apples-to-apples comparison.