During 2008 and 2009, GuruFocus introduced the concept of Business Predictability to the value investing community(We actually introduce the concept to everyone investing, but people outside of the value investing world wouldn’t listen). We found investing in stocks of companies with high Business Predictability not only enhance performances but also reduce risk of permanent losses. (See the links at the end of this article).
At the end of 2009, GuruFocus placed additional requirements on the predictable companies and came up with two new stock screeners that search for Companies With Historical Low Price/Sales Ratios And Price/Bookvalue Ratios.
Specifically, the Historical Low Price/Sales Screener screens for high quality companies sold at historical low P/S ratios. These companies have been very predictable in their business operations, their sales and earnings have consistently grown for at least the past decade. However the price/sales (P/S) ratios of these companies are less than 30% above their historical lows.
We are not the first one apply the Low P/S strategy. Among the Gurus we track, Arnold Van Den Berg and Kenneth Fisher are two Investment Gurus practice this strategy. Even Warren Buffett is said to use a ratio to judge whether the stock market is getting too expensive. That ratio is the total market cap (TMC) over gross national product (GNP). If you apply this ratio to the valuation of a business, it is precisely price/sales ratio of the company stock.
In parallel, The Historical Low Price/Bookvalue Screener looks for companies with low Price/Bookvalue ratio less than 30% above their historical lows.
At the beginning of 2010, GuruFocus set up two new model portfolios -- Historical Low P/S, and Historical Low P/B portfolios – to track the performance of the two screeners. Top 25 companies from each screener were selected and an imaginary $4000 was invested in each stock at open price of January 1, 2010. So a total of imaginary $100,000 was invested in each portfolio
The following chart is the performance of the Low P/B portfolio as compared to that of S&P 500:
One year past, and we are glad to report that during the past year (minus a few days), the portfolio returned 16.8% vs. S&P 500’s 12.7% gain.
Round 1, Historical Low P/B Portfolio won.
Since there are only a number of trading days left, I guess it is OK for me to tip my hand and give away the list completely. Please do not linger on this list as we are rebalancing the portfolio at the end of this year and much change will be introduced to the portfolio:
(click for a full sized picture)
As you can see, of the 25 stocks chosen, 20 went up and 5 went down. The best performing stock has been Lakeland Bancorp Inc. (LBAI), which climbed 81.06%, and the worst performing stock has been Apollo Group (APOL), which declined 35.44%.
Here we celebrate the winners:
Lakeland Bancorp Inc. (LBAI)
LAKELAND BANCORP INC. is a bank holding company engaged in general banking business. Lakeland Bancorp Inc. has a market cap of $278.4 million; its shares were traded at around $11.57 with a P/E ratio of 23.1 and P/S ratio of 1.8. The dividend yield of Lakeland Bancorp Inc. stocks is 2.1%.
LBAI gained 81.06% YTD.
Family Dollar Stores Inc. (FDO)
Family Dollar Stores, Inc. is one of the fastest growing discount store chains in the United States. Family Dollar Stores Inc. has a market cap of $6.25 billion; its shares were traded at around $49.67 with a P/E ratio of 18.9 and P/S ratio of 0.8. The dividend yield of Family Dollar Stores Inc. stocks is 1.2%. Family Dollar Stores Inc. had an annual average earnings growth of 8.1% over the past 10 years. GuruFocus rated Family Dollar Stores Inc. the business predictability rank of 4-star.
FDO gained 78.48% YTD.
South Jersey Industries Inc. (SJI)
South Jersey Inds Inc. is engaged in the business of operating, through subsidiaries, various business enterprises. South Jersey Industries Inc. has a market cap of $1.59 billion; its shares were traded at around $53.2 with a P/E ratio of 20 and P/S ratio of 1.9. The dividend yield of South Jersey Industries Inc. stocks is 2.7%. South Jersey Industries Inc. had an annual average earnings growth of 5.2% over the past 10 years.
SJI gained 39.34% YTD.
Valero Energy Corp. (VLO)
Valero Energy Corporation owns and operates refineries in the United States and Canada with a combined throughput capacity of approximately two million BPD, making it one of the nation's top refiners of petroleum products. Valero Energy Corp. has a market cap of $13.03 billion; its shares were traded at around $23.02 with a P/E ratio of 23.4 and P/S ratio of 0.2. The dividend yield of Valero Energy Corp. stocks is 0.9%. Valero Energy Corp. had an annual average earnings growth of 11.9% over the past 10 years.
VLO gained 37.43% YTD.
Brown & Brown Inc. (NYSE:BRO)
Brown & Brown, Inc. and its subsidiaries offer a broad range of insurance and reinsurance products and services, as well as risk management, third party administration, managed health care, and Medicare set-aside services and programs. Brown & Brown Inc. has a market cap of $3.43 billion; its shares were traded at around $24.07 with a P/E ratio of 22.4 and P/S ratio of 3.5. The dividend yield of Brown & Brown Inc. stocks is 1.3%. Brown & Brown Inc. had an annual average earning growth of 16.2% over the past 10 years. GuruFocus rated Brown & Brown Inc. the business predictability rank of 2.5-star.
BRO gained 33.95 YTD.
The model portfolio will be rebalanced on New Year’s Day of 2011 and premium members will have the opportunity to see the new slate of stocks at the beginning of the year. If you are not a premium member, we invite you for a 7-day Free Trial of our Premium Membership. Time is running up for the year. Start the new year with the strategies that works.
More readings: GuruFocus research on business predictability.
1. What worked in the marketfrom 1998-2008? Part I: Predictability Rank
2. What worked in the market from 1998-2008? Part II: Role of Valuations, Under-Valued Predictable Companies and Buffett-Munger Screener
3. What worked in the market from 1998-2008? Intrinsic Value, Discounted Cash Flow and Margin of Safety
4. GuruFocus Research: What worked in the market from 1998-2008? Revisiting Business Predictability
5. What Worked in the Market In the Decade of 2000-2009?