A Portfolio Of Value Stocks That Has Outperformed The Market By A Big Margin

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 |  Includes: FVE, IM, KELYA
by: Arie Goren

I tried to create a value stocks portfolio consists of twenty stocks that can outperform the market by a big margin. The following screen shows such promise. I have searched for highly profitable companies that have an extremely low price-to-sales ratio and a remarkably low price to book value. Those stocks also would have to show a very low debt.

The screen's method that I used to build this portfolio requires all stocks to comply with all following demands:

  1. The stock does not trade over-the-counter (OTC).
  2. Market cap is greater than $100 million.
  3. Price is greater than 1.00.
  4. Total debt to equity is less than 0.50.
  5. Trailing P/E is less than 20.
  6. Forward P/E is less than 20.
  7. Price-to-sales ratio is less than 1.00
  8. Price to book value is less or equal 1.00
  9. The twenty stocks with the lowest price-to-sales ratio among all the stocks that complied with the first eight demands.

I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Yahoo Finance, finviz.com and Portfolio123.

After running this screen on November 11, 2013, before the market open, I discovered the following twenty stocks:

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The table below presents the total debt to equity, the trailing P/E, the forward P/E, the price-to-sales ratio and the price to book value for the twenty companies.

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Ingram Micro Inc. (NYSE:IM)

Ingram Micro Inc. distributes information technology products; and provides supply chain solutions, mobile device lifecycle services, and logistics solutions worldwide.

Ingram Micro has a very low debt (total debt to equity is 0.23), and it has a very low trailing P/E of 12.25 and a very low forward P/E of 9.28. The price-to-sales ratio is extremely low at 0.09, and the price to book value is also low at 0.97. The PEG ratio is very low at 0.88, and the average annual earnings growth estimates for the next five years is quite high at 11.85%.

The IM stock price is 0.86% above its 20-day simple moving average, 2.61% above its 50-day simple moving average and 15.60% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Ingram Micro has recorded strong EPS and revenue growth during the last three years, as shown in the table below.

Most of Ingram Micro's stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the table below.

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Source: Portfolio123

On October 24, Ingram Micro reported its third-quarter financial results. Third quarter non-GAAP net income was $83 million, or 53 cents per diluted share, compared with non-GAAP net income of $62 million, or 41 cents per diluted share, in the 2012 third quarter. In the report, Alain Monie, Ingram Micro CEO, said:

Our focus on execution in the third quarter delivered strong improvements in profitability, as we continued to invest in our strategic objectives. Our teams were disciplined in managing growth, which was rewarded with strong year-over-year increases in worldwide gross margin, operating margin and EPS. Consolidated operating margin increased meaningfully over last year, directly benefiting from strong contribution from our acquired mobility business and significant improvements in two businesses that underperformed last year, as Australia made further progress on our goal to exit the year at a profitable run-rate and Brazil delivered good profitability. Our operational and strategic execution continues to build positive momentum in all of the regions and markets we serve, which we expect to accelerate in the typically strong fourth quarter.

Ingram Micro has compelling valuation metrics and good earnings growth prospects, and considering the fact that the stock is in an uptrend, IM stock can move higher.

Risks to the expected capital gain and to the dividend payment include; a downturn in the U.S. economy, and weakness in the consumer electronics market.

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Chart: finviz.com

Kelly Services, Inc. (NASDAQ:KELYA)

Kelly Services, Inc., together with its subsidiaries, provides workforce solutions to various industries worldwide.

Kelly Services has a very low debt (total debt to equity is only 0.11), and it has a trailing P/E of 16.53 and a low forward P/E of 13.08. The price-to-sales ratio is extremely low at 0.14, and the price to book value is also low at 1.00. The PEG ratio is at 1.40, and the average annual earnings growth estimates for the next five years is quite high at 10%. The forward annual dividend yield is at 0.96%, and the payout ratio is only 15.7%.

The KELYA stock price is 1.26% above its 20-day simple moving average, 5.08% above its 50-day simple moving average and 13.58% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.

Analysts recommend the stock. Among the three analysts covering the stock; two rate it as a strong buy, and one rates it as a hold.

Kelly Services has recorded strong EPS and revenue growth during the last three years, as shown in the table below.

Most of Kelly Services' stock valuation parameters have been better than its industry median, sector median and the S&P 500 median, as shown in the table below.

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On November 06, Kelly Services reported its third-quarter financial results, which beat EPS expectations by $0.15 and missed on revenues. Earnings from operations for the third quarter of 2013 totaled $20.2 million. Included in the results of operations in the third quarter of 2013 are restructuring charges of $0.5 million. Excluding the restructuring charges, earnings from operations were $20.7 million in the third quarter of 2013, compared to earnings of $24.0 million last year. Diluted earnings per share from continuing operations in the third quarter of 2013 were $0.49. Adjusted earnings per share were $0.51 in the third quarter of 2013 compared to $0.43 in the third quarter of 2012.

Kelly Services has compelling valuation metrics and good earnings growth prospects, and considering the fact that the stock is in an uptrend, KELYA stock can move higher. Furthermore, the solid dividend represents a nice income.

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Chart: finviz.com

Five Star Quality Care Inc. (NYSE:FVE)

Five Star Quality Care, Inc. operates and manages senior living communities in the United States.

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Source: Company presentation

Five Star Quality Care has a very low debt (total debt to equity is only 0.20), and it has a trailing P/E of 18.00 and a forward P/E of 16.94. The price-to-sales ratio is extremely low at 0.17, and the price to book value is also very low at 0.76. The PEG ratio is at 1.80, and the average annual earnings growth estimates for the next five years is quite high at 10%.

Five Star Quality will report its latest quarterly financial results on November 12. FVE is expected to post a profit of $0.06 a share.

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Source: Company presentation

Five Star Quality has good valuation metrics and good earnings growth prospects. In my opinion, FVE stock can move higher.

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Chart: finviz.com

Back-testing

In order to find out how such a screening formula would have performed during the last year, last 5 years and last 15 years, I ran the back-tests, which are available by the Portfolio123's screener.

The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

Since some readers could not get the same results that I got in some of my previous posts, I am giving, in the charts below, the Portfolio123 exact codes which I used for building this screen and the back-tests. The number of stocks left after each demand can also be seen in the chart. I am also giving a table which readers can use to copy and paste codes directly into the Portfolio123's screener.

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Universe(NOOTC)=TRUE

MktCap > 100

Close(0)> 1

DbtTot2EqQ < 0.50

PEExclXorTTM < 20

ProjPENextFY < 20

Pr2SalesTTM < 1

Pr2BookQ < 1

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One year back-test

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Five years back-test

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Fifteen years back-test

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Summary

The value stocks screen has given much better returns during the last year, the last five years and the last fifteen years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in all the three tests.

One year return of the screen was exceptionally high at 74.08%, while the return of the S&P 500 index during the same period was at 26.71%.

The difference between the value screen to the benchmark was even more noticeable in the 15 years back-test. The 15-year average annual return of the screen was at 21.99%, while the average annual return of the S&P 500 index during the same period was only 2.49%. The maximum drawdown of the screen was at 56.59%, while that of the S&P 500 was at 57%.

Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.