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Undervalued Predictable Companies Outperform Again

October 01, 2010 | About:

After a 56.7% gain in 2009, the model portfolio of Undervalued Predictable Companies continues to outperform the market. It gained 7.8% for the first three quarters of the year, compared with the around 2% gain of the market.

If you are not familiar with the model portfolio of Undervalued Predictable Companies, it consists of the 25 companies that have the largest margin of safety among the most predictable companies on the dates of inception/rebalance. There are several steps in creating the model portfolio:

1. Rank the predictabilities of the companies based on their 10-year history of business performances. The companies with the most predictable revenue and earning growths are ranked highest in business predictability. For details go to GuruFocus Research: What worked in the market from 1998-2008? Part I: Introduction of Predictability Rank

2. Calculate the intrinsic values of these companies based their financial data. Please read How to calculate intrinsic value using discounted cash flow model. You can also try to calculate the intrinsic values of companies with our fully automated DCF Calculator

3. Compare the intrinsic values of the companies with their share prices, and find out the top 25 stocks with the most of the margin of safety.

4. Rebalance once a year.

We update the intrinsic values of the predictable companies every day. The current list of the companies with the largest margin of safety is in the screen of Undervalued Predictable Companies.

Undervalued Predictable Companies is one of the value screens GuruFocus provides. You can see all of these value screens at the page of stock ideas. In this page you can find the screens of proven value strategies like Ben Graham Net-Net, historical low P/S companies etc.

Among the 25 companies in the model portfolio of Undervalued Predictable Companies, 7 are from 2009 portfolio. They have averaged more than 45% since added. Two of them are more than doubled. Landry's Restaurants Inc. (LNY) is in the process of being acquired. The company was offered a 110% premium on the average stock prices before the acquisition news.

Among the 18 companies that are added this January, only 4 are negative. The biggest loser is Nabors Industries Ltd. (NYSE:NBR), lost 17%. 3 companies have gains of more than 50%, which are Jos. A. Bank Clothiers Inc. (JOSB), PrePaid Legal Services Inc. (PPD), and Tractor Supply Company (NASDAQ:TSCO). This is the performance chart of the model portfolio since inception (Jan. 2009).


Therefore, as expected by value investors, investing in undervalued companies is a winning strategy. The predictability requirement we add here at GuruFocus reduces the risk further. The companies that have consistent revenue and earning growth tend to be high quality. Investing in high quality undervalued companies is a rewarding strategy.

To invest in these companies, please follow the guidelines in our simple DIY guide. The current list of the companies with the largest margin of safety is in the screen of Undervalued Predictable Companies.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 4.9/5 (7 votes)


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