Is 'Value' Alive And Well? Let's Ask The '29.9% In 9 Months' Portfolio...

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Includes: AGX, ALDW, ALJ, APOL, AR, ARLP, ATGE, ATW, BPI, BPT, CALM, CENX, CO, CYD, CYOU, ENTA, EPE, ESV, EXTN, GBX, GME, GPRO, HPQ, IBA, LCI, LEJU, MDR, MOH, NSU, OUTR, PDLI, PZE, RIG, RPXC, SAFM, SSL, TA, TRN, UEPS, VC, VLO, WDC, WLKP
by: Ryan Telford

Summary

This value strategy has earned 29.9% since March 1st of this year.

Not only did the strategy double the return of the Russell 3000TR benchmark over this period, but it also stayed ahead of the benchmark the entire time.

This performance is not uncommon for this value strategy.

We look at how other 9-month periods in 2016 have fared with this strategy.

(Credit: arborinvestmentplanner.com)

One "buy and hold" portfolio strategy that I use, and that I have written about, is the low EV/EBIT strategy. This is a value-based strategy, i.e. it screens cheap stocks. A variation of buying stocks with a low Price to Earnings ratio, or P/E ratio, this strategy looks at the ratio between the enterprise value (a more comprehensive value than share price alone) and earnings before interest and taxes, or EBIT (which arguably paints a more accurate picture than earnings). The idea is to buy the stocks passing the screen, hold for one year, and re-balance. To learn more about this strategy, read my strategy profile here.

Over time, this strategy boasts average annual returns of about 20%. In being the mean, there are periods of higher (and much higher) and lower (or much lower) returns. I follow two versions of this strategy, one which screens for the largest 20% of US stocks by market cap ("Large Cap"), and the largest 50% of US stocks ("Large & Mid Cap"). The past 9 months have been particularly kind to the latter strategy, as the graph below shows.

(Source: Portfolio123 data and Author Graph)

The strategy managed a return of 29.9% over the period, while the benchmark reached 14.4%. It is interesting to note here that the strategy's performance is in excess of the benchmark Russell 3000TR over the entire period. While both have stayed in positive territory the entire duration, the low EV/EBIT does so by a wider margin.

The stocks that made the screen at 01 Mar:

Ticker

Name

Price, 01 Mar

Price, 26 Nov

Change, %

Market Cap

Industry

Enterprise Value, EV

EBIT, TTM

EV/EBIT

($)

($)

($M)

($M)

($M)

APOL

Apollo Education Group Inc.

8.29

9.5

14.6

880.02

Education Services

47.25

170.59

0.28

PDLI

PDL BioPharma Inc.

3.05

2.4

-21.19

479.27

Biotechnology

516.72

453.71

1.14

CYD

China Yuchai International Ltd.

9.17

11.87

29.44

370.5

Construction & Farm Machinery & Heavy Trucks

165.74

121.31

1.37

CYOU

Changyou.com Ltd.

17.81

23.28

30.71

920.55

Home Entertainment Software

323.1

201.65

1.6

GBX

Greenbrier Companies Inc. (The)

24.83

37.8

52.26

702.63

Construction & Farm Machinery & Heavy Trucks

1,126.24

485.64

2.32

MOH

Molina Healthcare Inc.

63.74

52.41

-17.78

3,508.96

Managed Health Care

987.96

389.71

2.54

TA

TravelCenters of America LLC

8.98

6.6

-26.5

323.7

Automotive Retail

346.43

132.1

2.62

AGX

Argan Inc.

32.14

65

102.24

474.73

Construction & Engineering

194.7

73.88

2.64

HPQ

HP Inc.

10.62

15.08

42.06

19,191.57

Technology Hardware, Storage & Peripherals

22,618.57

7,408.00

3.05

UEPS

Net 1 UEPS Technologies Inc.

9.56

11.75

22.91

417.29

Data Processing & Outsourced Services

375.98

120.57

3.12

RPXC

RPX Corp.

10.24

10.54

2.93

535.17

Research & Consulting Services

210.85

65.6

3.21

VC

Visteon Corp.

72.3

78.02

7.91

2,865.20

Auto Parts & Equipment

608.2

185

3.29

ATW

Atwood Oceanics Inc.

6.58

8.24

25.23

419.05

Oil & Gas Drilling

1,911.78

577.02

3.31

LEJU

Leju Holdings Ltd.

3.83

4.26

11.23

490.24

Internet Software & Services

198.51

57.32

3.46

BPT

BP Prudhoe Bay Royalty Trust

23.05

21.15

-8.23

541.42

Oil & Gas Exploration & Production

540.42

153.8

3.51

RIG

Transocean Ltd.

9.07

11.4

25.69

3,148.90

Oil & Gas Drilling

9,277.90

2,487.00

3.73

HNT

Health Net Inc.

63.27

67.19

6.19

4,833.01

Managed Health Care

2,302.49

606.12

3.8

ALDW

Alon USA Partners LP

10.41

8.65

-16.9

638.85

Oil & Gas Refining & Marketing

797.98

203.51

3.92

TRN

Trinity Industries Inc.

16.04

27.3

70.24

2,421.88

Construction & Farm Machinery & Heavy Trucks

4,945.38

1,260.10

3.92

EPE

EP Energy Corp.

1.96

4.39

123.98

427.94

Oil & Gas Exploration & Production

5,330.94

1,349.00

3.95

ENTA

Enanta Pharmaceuticals Inc.

29.88

31.29

4.72

533.78

Biotechnology

354.51

89.53

3.96

WLKP

Westlake Chemical Partners LP

16.33

20.65

26.49

465.43

Commodity Chemicals

1,430.49

359.33

3.98

CALM

Cal-Maine Foods Inc.

53.06

40.95

-22.83

2,543.08

Packaged Foods & Meats

2,153.80

524.84

4.1

OUTR

Outerwall Inc.

30.27

52

71.77

523.98

Specialty Stores

1,187.04

287.26

4.13

CO

China Cord Blood Corp.

5.8

4.99

-13.97

428.53

Health Care Services

145.18

34.62

4.19

WDC

Western Digital Corp.

44.72

62.27

39.24

10,182.48

Technology Hardware, Storage & Peripherals

6,827.48

1,562.00

4.37

ESV

Ensco Plc

8.63

8.28

-4.06

1,979.29

Oil & Gas Drilling

6,577.39

1,502.90

4.38

ALJ

Alon USA Energy Inc.

9.57

9.56

-0.14

709.15

Oil & Gas Refining & Marketing

1,062.11

240.52

4.42

MDR

McDermott International Inc.

3.35

6.5

94.03

760.07

Oil & Gas Equipment & Services

882.23

195.43

4.51

ARLP

Alliance Resource Partners LP

10.29

23.25

126.03

758.21

Coal & Consumable Fuels

1,646.63

361.43

4.56

(Source: Portfolio123 data)

Looking at this table, 1/3 of the stocks dropped in value over the period, but none dropped by more than 25%. The remaining 2/3 of the stocks all increased in value, four with gains over 90%! These four are oil and gas (EPE and MDR), construction, and the unloved industry of coal; all industries that this strategy historically screens and identifies as undervalued.

We're not yet at a 12-month point so we cannot fairly compare to annual returns of this strategy. If return in the last 9 months is any indication however, we may reach, or outperform the strategy average.

With an average return of 20% since 1999, this strategy has beaten the benchmark over a 1-year period 66% of the time (see the EV/EBIT strategy article for performance). Let's see how this strategy shapes out.

So you may be asking, "what's the catch?"

Another Perspective

If you have been reading my recent articles on quantitative investing, you will know that looking at a given strategy over different time periods can show varying results, sometimes by a dramatic degree. This is why it is critical that backtest results consider performance over many rolling periods. For a discussion on rolling periods, please click here.

What would happen if we took a position in this strategy one month earlier, on 01 Feb, and held for the same period of 9 months? Let the graph below tell us the story:

(Source: Portfolio123 data and Author Graph)

This is still a decent return of 14% over the period vs. 12.2% of the benchmark. The strategy was tied to the benchmark over some periods, trying to break out in other periods. If we looked at this strategy until the end of September, the return would have been just over 20%. The month of October took away over 5% of return to this strategy. Still, a decent showing.

Stocks making the screen on 01 Feb:

Ticker

Name

Price, 01 Feb

Price, 31 Oct

Change

Market Cap

Industry

Enterprise Value, EV

EBIT, TTM

EV/EBIT

($)

($)

(%)

($M)

($M)

($M)

APOL

Apollo Education Group Inc.

7.87

8.67

10.17

861.57

Education Services

28.8

170.59

0.17

MOH

Molina Healthcare Inc.

54.94

55.22

0.51

3,079.08

Managed Health Care

380.65

407.15

0.93

PDLI

PDL BioPharma Inc.

3.01

3.31

10.09

513.62

Biotechnology

615.36

455.1

1.35

VC

Visteon Corp.

66.82

70.02

4.79

2,742.08

Auto Parts & Equipment

367.08

246

1.49

NSU

Nevsun Resources Ltd.

2.53

2.87

13.23

537.41

Diversified Metals & Mining

259.58

140.75

1.84

CYOU

Changyou.com Ltd.

17.6

27

53.41

955.89

Home Entertainment Software

397.89

211.68

1.88

AGX

Argan Inc.

29.43

55.85

89.79

446.56

Construction & Engineering

166.53

73.88

2.25

GBX

Greenbrier Companies Inc. (The)

24.79

30.4

22.63

739.52

Construction & Farm Machinery & Heavy Trucks

1,163.13

485.64

2.4

CYD

China Yuchai International Ltd.

8.55

11.16

30.53

358.66

Construction & Farm Machinery & Heavy Trucks

397.51

161.57

2.46

ENTA

Enanta Pharmaceuticals Inc.

25.59

24

-6.21

481.03

Biotechnology

336.58

124.15

2.71

HPQ

HP Inc.

9.37

14.13

50.77

17,514.11

Technology Hardware, Storage & Peripherals

25,129.11

8,381.00

3

LCI

Lannett Co. Inc.

25.49

21.75

-14.67

927.59

Pharmaceuticals

706.28

231.27

3.05

ATW

Atwood Oceanics Inc.

6.05

8.07

33.39

396.33

Oil & Gas Drilling

1,968.29

607.51

3.24

EXTN

Exterran Corp.

16.15

15.88

-1.67

573.61

Oil & Gas Equipment & Services

540.91

158.39

3.42

UEPS

Net 1 UEPS Technologies Inc.

10.78

10.34

-4.08

514.87

Data Processing & Outsourced Services

447.35

126.61

3.53

BPT

BP Prudhoe Bay Royalty Trust

24.68

21.75

-11.86

573.09

Oil & Gas Exploration & Production

572.09

153.8

3.72

OUTR

Outerwall Inc.

31.77

52

63.67

582.91

Specialty Stores

1,232.70

318.58

3.87

CALM

Cal Maine Foods Inc.

50.19

37.9

-24.49

2,447.54

Packaged Foods & Meats

2,058.27

524.84

3.92

RPXC

RPX Corp.

11.52

9.87

-14.32

629.8

Research & Consulting Services

269.17

68.6

3.92

GPRO

GoPro Inc.

11.13

13.54

21.65

1,574.65

Consumer Electronics

1,061.55

269.73

3.94

WLKP

Westlake Chemical Partners LP

17.91

20.6

15.01

516.85

Commodity Chemicals

1,436.13

362.58

3.96

ESV

ENSCO Plc

9.39

8.1

-13.72

2,303.68

Oil & Gas Drilling

7,127.28

1,747.80

4.08

DV

DeVry Education Group Inc.

19.57

23.1

18.02

1,265.10

Education Services

820.99

195.96

4.19

MDR

McDermott International Inc.

2.68

5.33

98.88

659.54

Oil & Gas Equipment & Services

802.84

189.44

4.24

ALJ

Alon USA Energy Inc.

11.77

8

-32.01

891.22

Oil & Gas Refining & Marketing

1,249.04

292.06

4.28

LEJU

Leju Holdings Ltd.

3.94

4.03

2.28

537.38

Internet Software & Services

245.65

57.32

4.29

EPE

EP Energy Corp.

3.45

3.93

13.91

930.51

Oil & Gas Exploration & Production

5,833.51

1,349.00

4.32

GME

GameStop Corp.

24.86

23.6

-5.09

2,749.43

Computer & Electronics Retail

2,914.13

659

4.42

CO

China Cord Blood Corp.

6

5

-16.67

436.56

Health Care Services

153.21

34.62

4.43

IBA

Industrias Bachoco SAB De CV

42.58

51.87

21.82

2,166.00

Packaged Foods & Meats

1,559.23

348.73

4.47

(Source: Portfolio123 data)

Overall return was helped by 4 stocks earning more than 50% (AGX, HPQ, OUTR, MDR), and only two with losses of 25% or more (CALM, ALI).

What about if I took this a step further, and invested on the first of January of this year, and held for 9 months? Take a look at the graph below.

(Source: Portfolio123 data and Author Graph)

Clearly, the strategy underperformed over this period at 7.46%, compared to the benchmark of 9.89%. While the benchmark return is lower than in the other periods, the strategy underperformed the other periods and the benchmark. Of importance in this period was the general market sell-off in early January, which was not an issue in the other two periods.

Stocks that made the cut for this period:

Ticker

Name

Price, 01 Jan

Price, 30 Sep

Change

Market Cap

Industry

Enterprise Value, EV

EBIT, TTM

EV/EBIT

($)

($)

(%)

($M)

($M)

($M)

APOL

Apollo Education Group Inc.

7.57

7.95

5.02

899.72

Education Services

61.03

203.04

0.3

PDLI

PDL BioPharma Inc.

3.36

3.35

-0.17

616.67

Biotechnology

718.41

455.1

1.58

MOH

Molina Healthcare Inc.

59.37

58.32

-1.77

3,430.67

Managed Health Care

732.24

407.15

1.8

NSU

Nevsun Resources Ltd.

2.58

3.03

17.31

551.4

Diversified Metals & Mining

273.57

140.75

1.94

BPI

Bridgepoint Education Inc.

7.47

6.87

-8.03

364.43

Education Services

75.27

29.2

2.58

AGX

Argan Inc.

32.13

58.16

81.01

481.55

Construction & Engineering

201.52

73.88

2.73

CYD

China Yuchai International Ltd.

9.93

10.85

9.27

411.75

Construction & Farm Machinery & Heavy Trucks

450.6

161.57

2.79

TA

TravelCenters of America LLC

9.27

7.16

-22.76

374.76

Automotive Retail

397.5

132.1

3.01

EXTN

Exterran Corp.

16.41

15.68

-4.45

548.26

Oil & Gas Equipment & Services

515.56

158.39

3.26

HPQ

HP Inc.

11.27

15.53

37.85

21,157.62

Technology Hardware, Storage & Peripherals

28,772.62

8,381.00

3.43

GBX

Greenbrier Companies Inc. (The)

31.2

35.07

12.39

1,039.21

Construction & Farm Machinery & Heavy Trucks

1,365.38

391.76

3.49

RPXC

RPX Corp.

10.91

10.69

-2.02

599.89

Research & Consulting Services

239.25

68.6

3.49

BPT

BP Prudhoe Bay Royalty Trust

23.64

18.06

-23.58

555.33

Oil & Gas Exploration & Production

554.33

153.8

3.6

CYOU

Changyou.com Ltd.

23.65

27.25

15.22

1,321.83

Home Entertainment Software

763.82

211.68

3.61

ENTA

Enanta Pharmaceuticals Inc.

34.19

26.61

-22.17

602.5

Biotechnology

458.06

124.15

3.69

ATW

Atwood Oceanics Inc.

10.59

8.69

-17.94

709.9

Oil & Gas Drilling

2,281.86

607.51

3.76

CALM

Cal Maine Foods Inc.

46.56

38.54

-17.23

2,400.02

Packaged Foods & Meats

2,010.74

524.84

3.83

ARLP

Alliance Resource Partners LP

12.35

21.77

76.37

1,039.39

Coal & Consumable Fuels

1,974.36

489.36

4.03

OUTR

Outerwall Inc.

34.82

52

49.32

657.76

Specialty Stores

1,307.55

318.58

4.1

WLKP

Westlake Chemical Partners LP

19.99

22.46

12.33

571.78

Commodity Chemicals

1,491.06

362.58

4.11

EPE

EP Energy Corp.

4.78

4.38

-8.37

1,179.31

Oil & Gas Exploration & Production

6,082.31

1,349.00

4.51

PZE

Petrobras Argentina SA

5.45

6.58

20.73

1,108.43

Integrated Oil & Gas

1,317.44

290.44

4.54

UEPS

Net 1 UEPS Technologies Inc.

13.03

8.56

-34.31

644.54

Data Processing & Outsourced Services

577.01

126.61

4.56

CENX

Century Aluminum Co.

4.53

6.95

53.42

412.93

Aluminum

544

114.71

4.74

GME

GameStop Corp.

26.87

27.18

1.18

2,976.01

Computer & Electronics Retail

3,140.71

659

4.77

SSL

Sasol Ltd.

25.93

27.32

5.36

18,577.56

Integrated Oil & Gas

18,119.84

3,790.70

4.78

AR

Antero Resources Corp.

22.68

26.95

18.83

6,310.74

Oil & Gas Exploration & Production

12,024.67

2,475.68

4.86

SAFM

Sanderson Farms Inc.

73.4

96.33

31.25

1,832.98

Packaged Foods & Meats

1,646.33

336

4.9

ESV

ENSCO Plc

15.84

8.5

-46.33

3,759.38

Oil & Gas Drilling

8,582.98

1,747.80

4.91

VLO

Valero Energy Corp.

67.13

52.51

-21.78

34,743.84

Oil & Gas Refining & Marketing

37,370.84

7,508.00

4.98

(Source: Portfolio123 data)

The Takeaway:

Anyone investing on March 1st of this year in the low EV/EBIT strategy, Large & Mid Cap US would be a very happy camper right about now. As a value-based strategy, is this performance enough to answer the title question, "Is Value alive and well"? Let's see what time brings.

The other takeaway of this discussion is that quantitative "buy and hold" strategy performance can vary considerably over the short term, the low EV/EBIT strategy being no exception. Be sure to take this into account when you are reviewing short-term performance result of a strategy.

Follow me on Seeking Alpha for more articles on Quantitative Value Investing!

Disclosure: I am/we are long AGX, ARLP, BPI, HPQ, NSU, RPXC, SSL, TA, TRN, UEPS, VLO, WDC.

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.

Additional disclosure: I am a user of Portfolio123 and have included affiliate links in this article.

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