Compound Your Returns With Value Stocks: Investment Ideas June 20
The value investing style is a popular style in volatile markets as it evokes stability over some of the other styles of investing. Value stocks are usually defined as companies currently trading at a discount to their true value.
In a standard definition, value stocks have relatively low price-to-earnings (P/E) ratios and price-to-book (P/B) ratios. Generally, they have higher dividend yields than other investing styles, although not every value stock will pay a dividend.
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Zacks Value Trader identifies undervalued stocks that should also have superior timeliness thanks to a high Zacks Rank. The premise behind the Zacks Rank is that earnings estimate revisions are the most powerful force impacting stock prices.
Zacks Rank is a proprietary quantitative model that uses four factors related to earnings estimates to classify stocks into five groups, ranging from "Strong Buy" to "Strong Sell." Zacks continually compiles and analyzes research reports issued by approximately 3000 analysts from 150 brokerage firms.
As an example, here are some of the recent trades made in the Value Trader portfolio:
ConocoPhillips (COP), the large integrated oil company, was added to the Value Trader on Feb 13 when it had a forward P/E of only 7.30 compared to an industry average of 12.3. The stock was held in the portfolio until June 4 for a gain of 17.91% as crude and natural gas prices soared.
EnPro Industries (NPO), which manufactures industrial sealing products, compressor systems, diesel and dual- fuel engines and other engineered products, had a forward P/E of 6.97, well-under the industry average of 12.5, when it was added to the Value Trader on Apr 2. Its price-to-book was 1.42 at the time. NPO was sold from the portfolio on June 3 with a gain of 19.33%.
Superior Essex (SPSX), manufacturer of wire and cable products, was another great undervalued stock when it was added to the Value Trader on Feb 28. It had a P/E of only 8.55 and a P/B of 1.32. Superior Essex racked up a gain of 37.78% by the time it was sold from the portfolio on May 15.
Unit Corporation (UNT), an oil and natural explorer, was added to the portfolio on Mar 20. Despite being in the hot energy sector, when it was added it had a forward P/E of just 8.35, which was well-under the industry average of 10.93. Its price-to-book was also significantly under the industry average, at 1.77 compared to 2.34. Unit was sold from the portfolio on May 1 with a gain of 18.73%.
We believe that the market doesn't overlook these companies for long and therefore they will have superior price appreciation in the next few months. The Value Trader seeks to reduce volatility by having a three month or longer holding period and a portfolio size up to seven stocks.
The Value Trader targets average returns of 10% every three months. Compounded, that is a return of 46.4%.
While the examples given above had outstanding gains, not all trades will be profitable. However, the road to financial success is paved with a series of small gains on short-term trades that, over the course of a year, should add up to significant performance at year's end.
