There are a wide variety of screeners on the GuruFocus site. Some of them apply general preset criteria to our All-in-One screener, allowing users to customize them, while others are based on a more well-defined strategy. Some even have model portfolios based on them, in which GuruFocus has tracked the performance of the screener’s top 25 stocks over the years.
In this series, I will be highlighting some of the most popular GuruFocus screeners. These are the screeners that many find to be particularly useful in searching the markets for potential investment opportunities. Each of them has their own uses depending on the criteria they look at, but they can all provide a good starting point for further research.
The Undervalued Predictable screener
As its name suggests, the Undervalued Predictable screener uses two main characteristics to screen for stocks: predictability and undervaluation.
Predictability is measured by the GuruFocus Business Predictability Rank. Using a scale of one to five stars, the predictability rank measures the strength and consistency of a company’s revenue per share and Ebitda per share over the past 10 fiscal years. According to the backtesting studies conducted by GuruFocus, a higher business predictability rank generally correlates with higher capital gains and lower risk of making a loss on a long-term investment.
Meanwhile, undervaluation is determined by GuruFocus’ discounted cash flow model. To make the Undervalued Predictable list, the stock needs to be undervalued based on the free cash-flow based DCF model or the earnings-based DCF model. The assumptions for the DCF model used in the screener are as follows:
- A discount rate of 12%.
- A growth rate for the next 10 years that is the same as the average growth rate of the past 10 years (if the growth rate is higher than 20%, we will use 20%, and if the growth rate is lower than 5%, we will use 5%).
- A terminal-stage growth rate of 4%.
- The growth rates for free cash flow and earnings are calculated using the trailing 12-month numbers and the 10-year compound growth rates.
The default view of the screener displays the following categories of information about each of the stocks that make the cut:
Uses and pitfalls
The stocks that make the Undervalued Predictable screener are ones that have a consistent history of growing their profitability, but which are undervalued based on their historical earnings or free cash flow growth.
The default list view shown above is good for getting a side-by-side comparison of several different valuation metrics for the companies that make the list. There are also two alternate views of the Undervalued Predictable stocks: the “chart” view and the “map” view.
The chart view shows thumbnails of several different charts for each of the stocks in the screener, such as the GF Value chart, the Peter Lynch Earnings Line chart, etc.
On the map view, the stocks are shown as colored boxes that are either red, black or green. When you select one of the criteria from the drop-down menus at the top – for example, the three-year average share buyback ratio – the stocks that have a good value for that metric will display as green boxes, while the stocks that have a bad value for that metric will display as red boxes (black means the number isn’t necessarily good or bad).
The Undervalued Predictable screener does not take financial strength into account, so investors looking to pick specific stocks from the screener may need to pay attention to potential balance sheet complications. However, companies that have generated consistent profitability over the years will have typically achieved a sturdy balance sheet by this point, even if some of them were on more shaky financial ground during their early days.
Another potential issue that may crop up with stocks on this screener is that there may be outside factors keeping their prices depressed. Perhaps investors are unenthusiastic about the stock because it operates in a “boring” industry, or perhaps some key piece of new legislation was introduced in the company’s home country that investors are expecting to negatively impact results. Regardless of whether or not the reason for a stock’s undervaluation seems justified, it is possible for investors to keep assigning it a lower valuation going forward.
Model portfolio
GuruFocus has a model portfolio for the Undervalued Predictable screener. It consists of the 25 stocks on the screener with the highest predictability ratings and highest level of undervaluation as of the day of the last rebalance (the model portfolios are rebalanced on the first trading day of the year). The stocks are given equal weighting in the portfolio, and if there are less than 25 stocks that make the cut, then the model portfolio for that year will simply consist of less than 25 holdings.
Below is a chart comparing the performance of the Undervalued Predictable model portfolio to the S&P 500. Since inception, this model portfolio has typically outperformed the S&P 500. However, during the financial crisis, the model portfolio underperformed the S&P 500, and in the market crash in March of 2020, it dropped down to about the same level as the benchmark and has been trading around the same level on average since then, albeit with more volatility.
Based on the history of this model portfolio, the stocks in it seem to outperform the broader market on average, likely due to investors reassessing their value and becoming willing to pay higher prices for them. However, during times of market turmoil, investors seem to stick with their low opinions of these stocks, potentially because the companies behind them don’t do as well during bear markets. Investors looking for opportunities to outperform the benchmark during bull markets might find attractive opportunities among the stocks that make this screener.
