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PowerStocks Management Team
Monday, March 9, 2009
Tuesday, February 17, 2009
JSE Power of Value,Part-IV
PREVIOUS : JSE Power of Value,Part-I
PREVIOUS : JSE Power of Value,Part-II
PREVIOUS : JSE Power of Value,Part-III
Let us examine some other interesting and important data about our research for 2000-2008 and how low price/book shares outperform the market.
First, the research shows better outperformance for smaller cap stocks less than R1Bn (roughly 65% of the smallest stocks on the JSE), especially for decile-10. This is shown below, and the graphs for 1,2 and 3 year growths are very similar to the one below.
Secondly, decile-10 consistantly and convincingly outperformed the ALSI group in each period of growth, for both large and small-cap universes. As shown below the small cap group outperformed the market 4.9x on average, over 1 year, whilst the All-cap group out-performed the market on average 2.7 times over five years.
Thirdly, standard deviation (volatility) for market out-performance among the 4 different sets of data shows a remarkably minute 0,25 for the 5 year growth period. As to be expected, volatility for overall market out-performance for shorter growth periods is much higher.
The most important observation from the above is that over four subsequent sets of 5 year growth periods, the lowest price/book decile (decile-10) with average maximum price/book ratio of 0,37 out-performed the ALSI by an average of 2.6 times with a tiny standard deviation of 0.25. This gives us high confidence that a strategy of constructing portfolios of 25-30 shares with the lowest price/book ratios not exceeding 0,37 should out-perform the general stock market indices by at least 2.35 times over a period of 5 years.
PREVIOUS : JSE Power of Value,Part-II
PREVIOUS : JSE Power of Value,Part-III
Let us examine some other interesting and important data about our research for 2000-2008 and how low price/book shares outperform the market.
First, the research shows better outperformance for smaller cap stocks less than R1Bn (roughly 65% of the smallest stocks on the JSE), especially for decile-10. This is shown below, and the graphs for 1,2 and 3 year growths are very similar to the one below.
Secondly, decile-10 consistantly and convincingly outperformed the ALSI group in each period of growth, for both large and small-cap universes. As shown below the small cap group outperformed the market 4.9x on average, over 1 year, whilst the All-cap group out-performed the market on average 2.7 times over five years.
Thirdly, standard deviation (volatility) for market out-performance among the 4 different sets of data shows a remarkably minute 0,25 for the 5 year growth period. As to be expected, volatility for overall market out-performance for shorter growth periods is much higher.
The most important observation from the above is that over four subsequent sets of 5 year growth periods, the lowest price/book decile (decile-10) with average maximum price/book ratio of 0,37 out-performed the ALSI by an average of 2.6 times with a tiny standard deviation of 0.25. This gives us high confidence that a strategy of constructing portfolios of 25-30 shares with the lowest price/book ratios not exceeding 0,37 should out-perform the general stock market indices by at least 2.35 times over a period of 5 years.
JSE Power of Value,Part-III
PREVIOUS : Power of Value on the JSE, Part-II
We had already shown in previous research (Price:Book, an all time classic) that in the crash of 2003, low price:book stocks outperformed high ones substantially over the ensuing 5 year bull run to 2008. By replicating the Brandes Institute exersise for the JSE for multiple 5 year periods, we were hoping to provide strong confirmation of trends discovered in our 2003 tests.
We only had data going back to 2000, so we could only create four sets of deciles to measure average 5 year growth, namely 2000-2005, 2001-2006, 2002-2007 and 2003-2008. We did however also decide to measure 1,2 and 3 year average growths for each of these decile sets. Decile sizes ranged from 25-27 shares depending on year. We are pleased to perform a first for the JSE with our results shown below:
We see startling confirmation that low price/book deciles substantially outperformed high price/book deciles, for 1,2,3 and 5 year growths, with significant outperformance by decile-10 which contained shares with lowest price-to-book ratios of an average of 0.37 and less. The results on the JSE are amplified enormously compared to other larger stock exchanges where similar research has been conducted. The graph below compares annualised compound growth achieved for each decile and growth period. Note how decile-10 has 1,2 and 3 year annualised growths almost identical at 66%:
Try and understand what the above graph is saying: "If you chose any starting date between the 4 year period of 2000 and 2003, and ranked the JSE by price-to-book and built a portfolio of the 25-27 lowest price-to-book shares, your portfolio would have grown on average 871% in 5 years, or 57.6% annual compound!" Put another way : "If you started in 2000, built a portfolio of the 25 lowest price:book shares and sold them 1 or 2 years later, and repeated the process you would have earned 66% average growth per annum for each of the four times you repeated the process!"
One last point : remember that the entire test period under review is 8 years (2000 - 2008) and thus includes the 2002/3 crash and the 2008 crash, which makes the above achievements even more remarkable.
NEXT : The Power of Value, Part-IV
We had already shown in previous research (Price:Book, an all time classic) that in the crash of 2003, low price:book stocks outperformed high ones substantially over the ensuing 5 year bull run to 2008. By replicating the Brandes Institute exersise for the JSE for multiple 5 year periods, we were hoping to provide strong confirmation of trends discovered in our 2003 tests.
We only had data going back to 2000, so we could only create four sets of deciles to measure average 5 year growth, namely 2000-2005, 2001-2006, 2002-2007 and 2003-2008. We did however also decide to measure 1,2 and 3 year average growths for each of these decile sets. Decile sizes ranged from 25-27 shares depending on year. We are pleased to perform a first for the JSE with our results shown below:
We see startling confirmation that low price/book deciles substantially outperformed high price/book deciles, for 1,2,3 and 5 year growths, with significant outperformance by decile-10 which contained shares with lowest price-to-book ratios of an average of 0.37 and less. The results on the JSE are amplified enormously compared to other larger stock exchanges where similar research has been conducted. The graph below compares annualised compound growth achieved for each decile and growth period. Note how decile-10 has 1,2 and 3 year annualised growths almost identical at 66%:
Try and understand what the above graph is saying: "If you chose any starting date between the 4 year period of 2000 and 2003, and ranked the JSE by price-to-book and built a portfolio of the 25-27 lowest price-to-book shares, your portfolio would have grown on average 871% in 5 years, or 57.6% annual compound!" Put another way : "If you started in 2000, built a portfolio of the 25 lowest price:book shares and sold them 1 or 2 years later, and repeated the process you would have earned 66% average growth per annum for each of the four times you repeated the process!"
One last point : remember that the entire test period under review is 8 years (2000 - 2008) and thus includes the 2002/3 crash and the 2008 crash, which makes the above achievements even more remarkable.
NEXT : The Power of Value, Part-IV
JSE Power of Value,Part-II
PREVIOUS : Power of Value on the JSE, Part-I
In October 2008, in another seminal research piece, the Brandes Institute sought to extend the research of Lakonishok, Shleifer and Vishny by first validating their methodology and then by adding 14 decile sets for the period 1990 to 2003 for a total of 36 decile sets. The research confirmed that the theory still held strong in more recent times.
The Brandes researchers then sought to build upon Fama and French’s 1998 work, examining value stocks and glamour stocks from a global perspective. Using the same methodology applied in the United States, they studied equities traded in 23 developed markets to evaluate global results. The results were startling and very similar for small and large cap stocks and are shown below:
Unfortunately, the JSE was not included in this research so naturally we decided to publish a seminal piece of research work ourselves, by conducting a similar excersise locally.
PREVIOUS : Power of Value on the JSE, Part-I
NEXT : Power of Value on the JSE, Part-III
In October 2008, in another seminal research piece, the Brandes Institute sought to extend the research of Lakonishok, Shleifer and Vishny by first validating their methodology and then by adding 14 decile sets for the period 1990 to 2003 for a total of 36 decile sets. The research confirmed that the theory still held strong in more recent times.
The Brandes researchers then sought to build upon Fama and French’s 1998 work, examining value stocks and glamour stocks from a global perspective. Using the same methodology applied in the United States, they studied equities traded in 23 developed markets to evaluate global results. The results were startling and very similar for small and large cap stocks and are shown below:
Unfortunately, the JSE was not included in this research so naturally we decided to publish a seminal piece of research work ourselves, by conducting a similar excersise locally.
PREVIOUS : Power of Value on the JSE, Part-I
NEXT : Power of Value on the JSE, Part-III
Monday, February 16, 2009
JSE Power of Value, Part-I
In Benjamin Graham's 1934 classic "Security Analysis" David Dodd and he argued that out-of-favor stocks are mostly underpriced in the market, and that investors could capitalise on this phenomenon to reap strong returns. Conversely, prices for widely popular stocks often are propped by unrealistic expectations and thus vulnerable if these prove too enthusiastic. This philosophy formed the beginnings of what is now widely known as value investing.
The most common metrics to measure value stocks are Price/Book, Price/Earnings and Price/Cashflow. In 1994, academics Josef Lakonishok, Andrei Shleifer, and Robert Vishny published “Contrarian Investment, Extrapolation, and Risk,” a seminal entry in the value investing research field. Using data from 1968 to 1989 they grouped U.S. stocks into decile (ten) segments ranked on price-to-book,price-to-cash flow, and price-to-earnings ratios. The research created 22 sets of deciles, and tracked 5 years of decile-by-decile performance for each price-to-x criteria. They concluded that value deciles based on low price-to-x values consistantly outperformed "glamour" deciles with high price-to-x values, by wide margins, as shown below with the Price-to-book example:
Eugene Fama of the University of Chicago’s Graduate School of Business and Kenneth French from MIT’s Sloan School of Management tackled a similar question in 1998’s “Value versus Growth: The International Evidence.” The researchers found that, from 1975 to 1995, value stocks outperformed glamour stocks in 12 of 13 major national equity markets. In their opinion, this laid to rest the possibility that the value outperformance noted by Lakonishok, Shleifer and Vishny was sample-specific happenstance. “Rather than being unusual,” Fama and French concluded, “the higher average returns on value stocks in the United States are a local manifestation of a global phenomenon.”
NEXT : Power of Value on the JSE, Part-II
The most common metrics to measure value stocks are Price/Book, Price/Earnings and Price/Cashflow. In 1994, academics Josef Lakonishok, Andrei Shleifer, and Robert Vishny published “Contrarian Investment, Extrapolation, and Risk,” a seminal entry in the value investing research field. Using data from 1968 to 1989 they grouped U.S. stocks into decile (ten) segments ranked on price-to-book,price-to-cash flow, and price-to-earnings ratios. The research created 22 sets of deciles, and tracked 5 years of decile-by-decile performance for each price-to-x criteria. They concluded that value deciles based on low price-to-x values consistantly outperformed "glamour" deciles with high price-to-x values, by wide margins, as shown below with the Price-to-book example:
Eugene Fama of the University of Chicago’s Graduate School of Business and Kenneth French from MIT’s Sloan School of Management tackled a similar question in 1998’s “Value versus Growth: The International Evidence.” The researchers found that, from 1975 to 1995, value stocks outperformed glamour stocks in 12 of 13 major national equity markets. In their opinion, this laid to rest the possibility that the value outperformance noted by Lakonishok, Shleifer and Vishny was sample-specific happenstance. “Rather than being unusual,” Fama and French concluded, “the higher average returns on value stocks in the United States are a local manifestation of a global phenomenon.”
NEXT : Power of Value on the JSE, Part-II
Thursday, February 5, 2009
Piotroski is our top JSE portfolio
We have been tracking the JSE performance of all our portfolio strategies created on the trough of 20 Nov 2008 (11 weeks ago). So far the best performing one is the "pure-form" Piotroski strategy that only purchases shares with a Piotroski F-Score of 8 or 9, a Price-to-book ratio less than 1.15 and a PE ratio less than 1.5x the ALSI (about 12).
A scan is run on each Monday to seek out new candidates for inclusion in the portfolio and to sell any holdings that have their F score drop below 8 due to a results (final or interim)announcement. On 20th Nov 2008 (inception date) it aquired 9 stocks and on 20 January 2009 and 5th Feb it aquired one stock respectively. On 5th Feb DRD Gold announced their interim and their Piotroski score dropped from 8 to 4 and the share was disposed for a 135% profit.
As our backtests on the 2003 JSE crash showed, this portfolio strategy is also performing remarkably well in such a short space of time (for a so-called Value strategy that is). It is currently out-performing the ALSI by 1.69 times (36.8% total return versus ALSI's 21.7%) since inception on 20 Nov 2008. For the calendar year 2009, the Piotroski portfolio has shown 13.5% return versus the ALSI's 0.82% (that is a remarkable 12.68% outperformance this year so far, or 16x the ALSI return!) Click on the image below for a larger more detailed view.
Piotroski's strategy was also the top performing strategy on the AAII web site for 2008, the only strategy out of 50 they are running that showed a positive return on the US markets!
For a list of the Piotroski stocks we are holding, as well as those still qualifying for purchase (ie they have not "run away" and become too expensive) in addition to a monthly email update on new candidates and current holdings that no longer qualify and must be sold, email powerstockz@gmail.com for an order form for R360 for 12 months of Piotroski Strategy Updates (SKU=PWS-PSU12M)
A scan is run on each Monday to seek out new candidates for inclusion in the portfolio and to sell any holdings that have their F score drop below 8 due to a results (final or interim)announcement. On 20th Nov 2008 (inception date) it aquired 9 stocks and on 20 January 2009 and 5th Feb it aquired one stock respectively. On 5th Feb DRD Gold announced their interim and their Piotroski score dropped from 8 to 4 and the share was disposed for a 135% profit.
As our backtests on the 2003 JSE crash showed, this portfolio strategy is also performing remarkably well in such a short space of time (for a so-called Value strategy that is). It is currently out-performing the ALSI by 1.69 times (36.8% total return versus ALSI's 21.7%) since inception on 20 Nov 2008. For the calendar year 2009, the Piotroski portfolio has shown 13.5% return versus the ALSI's 0.82% (that is a remarkable 12.68% outperformance this year so far, or 16x the ALSI return!) Click on the image below for a larger more detailed view.
Piotroski's strategy was also the top performing strategy on the AAII web site for 2008, the only strategy out of 50 they are running that showed a positive return on the US markets!
For a list of the Piotroski stocks we are holding, as well as those still qualifying for purchase (ie they have not "run away" and become too expensive) in addition to a monthly email update on new candidates and current holdings that no longer qualify and must be sold, email powerstockz@gmail.com for an order form for R360 for 12 months of Piotroski Strategy Updates (SKU=PWS-PSU12M)
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