The Marwood Value Model is a quantitative investing strategy that I created with the powerful simulator from Portfolio123. This is an extremely useful tool with institutional grade historical stock data, one that is used by the likes of Bank of America (BAC, Financial), Merrill Lynch, and Stanford Business School.
To cut a long story short, the Marwood Value Model, is based on a number of key metrics such as low price-to-earnings ratios and a strong balance sheet. When these metrics are combined, the annual performance has been extremely good. The chart below shows how the strategy has performed over the last 15 years. It has handily beaten the benchmark S&P 500 Index (blue line) while simultaneously having smaller drawdowns. Annualized return was in excess of 21%:
This week, the model has selected only two U.S. stocks (out of 7,000) that meet the criteria. They are: Valero Energy (VLO, Financial) and Net 1 UEPS Technologies (UEPS, Financial).
I will now go into the five reasons why value investors should consider investing in both of these companies:
1. Very low price to earnings
Both of these two companies possess extremely low price-to-earnings ratios at their current levels. UEPS trades at 9.57 times current earnings and Valero Energy trades at just 6.81 times current earnings. Similarly, both stocks forward PE ratios are also cheap, with both trading below 10 future, projected earnings.
2. Still moving higher
If you hadn't heard of Valero Energy before you'd probably have guessed that the company would have been hit hard by the energy crisis and the sharp drop in price for crude oil. But you would have been mistaken. Because VLO is one of the few oil refinery companies that has managed to weather the current downturn in commodity price exceedingly well. In fact, the stock is just 17% away from 52-week highs despite all the volatility we have seen so far this year.
It's a similar story for UEPS. Domiciled out of South Africa, the stock has managed to perform well away from the market chatter of China and the Federal Reserve. The stock currently trades just 10% away from its 52-week high.
3. Plenty of cash
As mentioned above, the Marwood Value Model takes into account several factors in the selection of deep value companies, one of those being the balance sheet and whether or not the company has enough cash in place to weather hard times.
For both of the two stocks in question, the answer is a resounding yes. Both companies have managed to grow their earnings by over 30% this year, and both have improved their balance sheets as a result. Valero Energy currently operates with a steady current ratio of 1.90 and UEPS has a current ratio of 1.30.
Most importantly, both companies have a price-to-free-cash flow of lower than 10. Through research and simulation, I have found that the level of FCF has a significant bearing on future returns so this is a big plus point for both companies.
Conclusion
No quantitative investing strategy should be relied upon on it's own to direct future investments. However, I find that utilizing a strong set of rules is the best way to filter down into the best value opportunities and the Marwood Value Model has a strong history of picking out extremely profitable trades.
There are many other reasons why these two stocks are attractive and of course there are many more reasons that should influence your decision on whether to buy. I talk about many of these reasons over on my blog and in my free eBook.
Over the long run, the value model has a strong backing and these two selections look like opportunities with excellent risk to reward.
