Model Portfolio Review – February 16, 2015

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Feb 16, 2015
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In recent six years, the S&P 500 gained 24.71% in 2009, 11.65% in 2010, 0% in 2011, 12.1% in 2012, 31.8% in 2013, and 11.39% in 2014. The market performance looks good. Could investors make more money by investing in GuruFocus Model Portfolios? It is time to check the performances. The following are the details of the performances of the four value strategies:

Value Strategies (Long):

Year S&P 500 Buffett-Munger Screener top 25 Top 25 Undervalued Predictable Companies Top 25 Historical Low P/S Ratio Companies Top 25 Historical Low P/B Ratio Companies
2009 24.71% 28.65% 55.72% Â Â
2010 11.65% 19.54% 20.17% 19.05% 16.39%
2011 -0% 6.01% -3.32% -2.01% -1.87%
2012 12.1% 11.01% 3.95% 16.34% 16.45%
2013 31.8% 30.37% 24.81% 29.60% 33.18%
2014 11.39% 2.94% 11.38% 15.09% 20.01%
2015 1.85% 0.93% 1.58% 2.94% 0.02%
Since Inception 145.14% 165.56% 108.39% 112.62%
Outperforming the S&P 11.75% 32.17% 21.24% 25.47%
Screener Links Screener Here Screener Here Screener Here Screener Here

* All numbers do not include dividends.

U.S. stock market had an excellent 2013. The market benchmark S&P 500 went up 31.8%, which is the highest since the financial crisis. Our portfolio of Top 25 Historical Low P/B Ratio Companies even outperformed the S&P 500 by 1.38%. 2014 was another strong year for the market. Our portfolio of Top 25 Historical Low P/B Ratio Companies outperformed the S&P 500 by 8.62% and the portfolio of Top 25 Historical Low P/S Ratio Companies outperformed the S&P 500 by 3.7%.

Since inception, the portfolio of Top 25 Undervalued Predictable Companies outperformed the market benchmark S&P 500 by 32.17%. The portfolio of historical low P/S outperformed the S&P 500 by 21.24%, and the portfolio of historical low P/B ratios outperformed the S&P 500 by 25.47%.

In 2015, the portfolio of historical low P/S beat the market benchmark S&P 500 by 1.09%, while the portfolio of Top 25 Undervalued Predictable Companieswas about even with the S&P.

The two model portfolios are for predictable companies that are traded at historical low P/S and historical low P/B ratios, respectively. Both of these two portfolios outperformed the market average in 2010, 2012, and 2014, but about even with the market in 2011. The portfolio of historical low P/B ratios outperformed the market by 1.38% in 2013, while the portfolio of historical low P/S slightly underperformed the S&P 500 by 2.2% in 2013. In 2014, the portfolio of historical low P/B ratios outperformed the S&P 500 by 8.62% and the portfolio of historical low P/S outperformed the S&P 500 by 3.7%. In all, since inception, historical low P/S outperformed the S&P 500 by 21.24%. The portfolio of historical low P/B ratios outperformed the S&P 500 by 25.47%. Please go to historical low P/S ratios and historical low P/B ratios for the complete stock lists.

Without any doubt, the portfolio of Top 25 Historical Low P/S Ratio Companies is very successful. It includes the predictable companies that are sold at close to historical low price/sales ratios. 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. The low P/S strategy has been used by Arnold Van Den Berg and Ken Fisher. GuruFocus has added the requirement of high business predictability to this strategy. The performances of these stocks are tracked in Top 25 Historical Low P/S. The strategy is discussed in New Features Released: Companies With Historical Low Price/Sales Ratios And Price/Book Ratios.

Both of the portfolios of Buffett-Munger Screener Top 25 and Top 25 Undervalued Predictable Companies were started in January 2009. In 2009 and 2010, Buffett-Munger Screener outperformed the market by around 4% and 8%. In 2011, the market was even, yet Buffett-Munger Screener outperformed the market by 6.01%. In 2012 and 2013, Buffett-Munger Screener was about even with the S&P 500. In 2014, it was underperformed the market. In 2015, it is slightly underperformed the market. Regarding to Top 25 Undervalued Predictable Companies, the portfolio gained 55.72% and 20.17% respectively in 2009 and 2010, almost double the return of the S&P 500 in that period. However, from 2011 to 2013, the portfolio of Top 25 Undervalued Predictable Companies underperformed the market. In 2014 and 2015, it was about even with the S&P 500. In all, since inception, Buffett-Munger Screener Top 25 outperformed the S&P 500 by 11.75%. The portfolio of Top 25 Undervalued Predictable Companies outperformed the market by 32.17%.

Warren Buffett (Trades, Portfolio) believes that to buy companies with “predictable and proven” earnings can be very profitable in stock market investing. Based on his strategy, GuruFocus develops "Buffett-Munger Screener", which helps to find companies with high quality business at undervalued or fair-valued prices:

  1. Companies that have high Predictability Rank, that is, companies that can consistently grow their revenue and earnings.
  2. Companies that have competitive advantages. It can maintain or even expand its profit margin while growing its business
  3. Companies that incur little debt while growing business
  4. Companies that are fair valued or under-valued. We use PEPG as indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past 5 years.

Both Buffett-Munger Screener and Top 25 Undervalued Predictable Companies select stocks from the companies that have the highest predictability rank. Top 25 Undervalued Predictable Companies Portfolio selects the stocks that are undervalued from DCF calculations. For the current list of undervalued predictable companies, go to the screener. For the current list of good companies at fair or undervalued price for Buffett-Munger screener, click here.

All the portfolios are rebalanced once a year; therefore, no portfolio changes will be made at this time.

From above analysis, we can see for single year, the performance of our portfolios may not beat the market, yet in the long run, it is profitable to invest using our model portfolios.

These are the summary of the four value strategies mentioned above:
1. Buffett-Munger screener: Invests in predictable companies that have low debt, consistent profit margin, and traded at low PE to growth ratios.
2. Undervalued Predictable Companies: Invests in predictable companies that are undervalued based on DCF model.
3. Historical low P/S: Companies that have high predictability rank, but traded at historical low P/S ratios.
4. Historical low P/B: Companies that have high predictability rank, but traded at historical low P/B ratios.

GuruFocus premium membership is needed to access the details of the portfolios and screeners. We also publish a monthly Buffett-Munger newsletter which features the picks from Buffett-Munger Screener. If you are a premium member, you can download this for free. If you are not a Premium Member, we invite you for a 7-day Free Trial.