In a previous article here on Seeking Alpha I spoke of my preference for quantitative, rules-based investing and I detailed a strategy that I called "Marwood Value".
Marwood Value is a strategy that selects stocks with low price to earnings ratios, low price-to-book ratios, and high levels of cash on the balance sheet.
Over 14 years of back-testing, Marwood Value has been able to outperform the benchmark by a healthy margin, posting a 19% annualized return after slippage and transaction fees.
This week, running the Marwood Value stock screen returned 10 companies, four of which were foreign ADR shares trading on US exchanges.
In the rest of this article I will detail my top three:
AU Optronics Corp. (NYSE:AUO)
A Taiwanese manufacturer of flat panel displays, AU Optronics Corp. is trading cheaply at the moment after a 16% drop in value since the beginning of the year. The company's decline was catalyzed by a worse than expected earnings report at the end of January, and projections of softer results in the first quarter of 2015. The share price fall has come even though AUO recorded its best annual profit since the financial crisis hit.
The case for the company is simple. It's trading at a low P/E in a market that's both mature and growing. It's been able to remain profitable on a consistent basis and has a fundamentally solid business.
Demand for flat panels is going up and the TFT panels that AU Optronics manufacture are demanded in bulk. Flat-panel televisions are still constantly upgraded in the developed world and the days of CRT TVs in the developing world are over.
At the same time, panels for smart phones are getting bigger and more expensive and demand is growing with each consecutive year. The upgrade cycle has not, as evidenced by the extreme success of the iPhone 6, lengthened just yet.
The stock jumped briefly last week after a couple of analysts increased their price targets on the company but has since given up those gains. Research analysts at Zacks raised their rating on the firm to Outperform, giving the stock a top rating of 1.
The bottom line is that AU Optronics may not be a technological market leader, but it is a solid company built to follow. The effect of a rising tide may be seen in this sector in the year ahead, and the company's shares look undervalued should that tide come in.
AUO's key price ratios are all single digits (with a P/E of 8.21, PEG of just 0.18 and price-to-book of 0.74), and as such the stock is a prime candidate for selection based on the Marwood Value system rules.
Shanda Games Limited (NASDAQ:GAME)
The China-based purveyor of online games, Shanda Games Limited has had a difficult year. The firm's shares lost more than 13% of their value in the last twelve months with the most dramatic part of that decline coming at the very end of last year.
What's really interesting about Shanda Games Limited is a deal under which the company was/is set to be acquired. With all parties operating out of China, and information not being all that easy to get hold of, the deal has become incredibly complex since it was announced in January 2014.
As of last November, around 24% of the company was owned by a textile company that was part of the consortium set to acquire the firm. 9% of the company was held by the acting CEO. The voting power of these shares is divided in a complicated fashion, with the 9% held by the acting CEO accounting for around 34.5% of the voting power. The 24% held by the textile company accounts for 40.1% of the voting power.
We're not going to reveal any insider information here, and there's likely no credible information to be had given the complexity of the deal. In December, a new consortium was formed to acquire the company, while the company reshuffled its board at the beginning of February.
The play is not in trying to predict the outcome of the deal to take Shanda Games Limited private, it's in recognizing the value that's already there and being ready to reap the reward of a possible acquisition.
The company, along with Tencent (OTCPK:TCEHY) and a couple of others, is a major player in the Chinese online gaming world, a market that's set to grow with China's economy, or faster. It trades at a P/E of just above 7, and it's presence on the Nasdaq is liquid despite the acquisition issues.
Take this with caveats, however. Shanda Games Limited is a Chinese company and it's been involved in the oddest of acquisitions over the last year. The company is a risky bet. It's cheap, but it's not for those looking to avoid the risks of opacity, a merit that Benjamin Graham stood by through his career.
Net 1 Ueps Technologies Inc. (NASDAQ:UEPS)
The final selection from the Marwood Value system is a South African payment solutions provider, Net 1 UEPS Technologies, Inc.
UEPS is trading at a low multiple, and investors are beginning to catch on to the company's value proposition. In the last twelve months the company's shares have increased in value by almost 45%.
Not only has the company being doing well in its local markets, it's also been expanding into new technologies and new regions. The firm set up a subsidiary in the United Kingdom in February of 2015, and announced that the business was handling Uber's transactions in South Africa using its propriety VCpay mobile application.
The company is using the application to virtualize credit cards, allowing users without access to regular credit to use online services like Uber. With so much of the emerging and developing world's population restricted from ordinary finance, credit services are an interesting play for the coming five years at least.
On top of all that, the company announced a much better than expected earnings at the beginning of February, spurring its stock price to march higher. The company's future seems to rely on massive growth, though that's not exactly priced into its P/E ratio making it one to watch in the year ahead.
The company is also light on debt, and has been gradually lowering its Debt/Equity ratio over the last number of years. Net 1 UEPS Technologies, Inc. is trading cheaply right now, but the company appears to be catching the eyes of investors across the world, meaning the opportunity may not last forever. If you're interested in FinTech solutions in emerging economies this is certainly one to watch.
I have now created a spreadsheet of my recent stock choices.
See the performance of my recent Seeking Alpha Picks Here
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in UEPS over the next 72 hours. Business relationship disclosure: This article was a joint effort between JB Marwood of Marwood Capital and Paul Shea.