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Quality Value Stocks: Apple

Apr. 03, 2018 1:19 PM ETApple Inc. (AAPL)45 Comments


  • Simplicity is the ultimate sophistication, and smart investing decisions don’t need to be too complicated.
  • Long-term investors generally focus on buying solid companies for an attractive valuation.
  • Quantitative indicators based on financial quality and valuation levels can be remarkably effective at picking outperforming stocks.
  • Apple offers particularly strong metrics in terms of quality and value combined.
  • The long-term picture in Apple stock looks quite favourable in the years ahead.

You can’t build a complete investment thesis for a company by looking solely at the numbers. It’s important to understand the main business drivers behind those numbers in order to fully evaluate the main risks and potential return in a particular stock. However, quantitative indicators can be tremendously powerful tools when it comes to identifying investment ideas with superior potential.

The following quantitative system is based on two simple return drivers: quality and value. In a nutshell, we want to buy companies with strong fundamentals and trading for convenient valuations, so the system averages down multiple ratios and indicators to find the companies that look more promising in terms of these two characteristics.

The quality factor is based on metrics such as gross margin, operating margin, free cash flow margin, return on investment, return on equity and long-term growth expectations. All else the same, it's easy to understand why companies with high profitability levels and above-average growth expectations should deliver superior returns over time.

The value factor in the ranking system includes metrics such as price to earnings, price to free cash flow, and enterprise value to EBITDA, among others. The lower the entry price, the higher the potential returns for investors.

The following backtest picks the 50 stocks in the S&P 500 index that have the strongest combination of quality and value indicators, and it builds an equally-weighted portfolio with those names. The portfolio is annually rebalanced, so turnover is quite low, and it has an assumed annual expense ratio of 1% to account for trading expenses. The benchmark is the SPDR S&P 500 Trust ETF (SPY).

Backtested performance numbers are quite strong. Since January of 1999 the portfolio recommended by the system produced an average annual return of 12.16%, far surpassing the 6.16% produced by the SPDR S&P 500 Trust ETF in

ChartAAPL data by YCharts

Members in The Data Driven Investor have access to quantitative systems to pick stocks and ETFs with the potential to outperform the market in the long term. In addition, the service offers multiple strategies to protect your portfolio in bear markets, and members know in real time when I make a buy or sell decision for my personal portfolio. A free trial is available now in this link.

This article was written by

Andres Cardenal, CFA profile picture
Proven strategies for superior returns and active risk management
Andrés Cardenal, CFA. Economist, financial analyst, columnist. Naturally flavored.

Analyst’s Disclosure: I am/we are long AAPL. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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