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Model Portfolios Review – How GuruFocus Value Strategies Outperformed

November 08, 2012 | About:

The stock market has gained 10.9% as measured by S&P 500, even after yesterday’s big drop. GuruFocus Value Strategies have mixed performance this year, so far. Since inception, all of them have outperformed the market.

GuruFocus has four value strategies:

1. Buffett-Munger screener: Invests in predictable companies that have low debt, consistent profit margin and traded at low P/E 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 are traded at historical low P/S ratios.

4. Historical low P/B: Companies that have high predictability rank, but are traded at historical low P/B ratios.

The annual performances of these strategies since inception are here:

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 23.5% 29.1% 56.7%
2010 12.8% 19.1% 19.4% 19% 16.4%
2011 -0% 6% -3.3% -2% -1.9%
2012 10.9% 8.9% 0.8% 13.9% 14%
Since Inception 77.5% 82.4% 32.8% 30.2%
Outperforming the S&P 23% 27.9% 7.7% 5.1%
Screener Links Screener Here Screener Here Screener Here Screener Here
* All numbers do not include dividends.

Historical low P/S and historical low P/B have shown quite consistent performances. Investing in companies at historical low valuations is a winning strategy proven by copious academic research. In GuruFocus’ strategies, we added another requirement: The companies must have consistent business performance. We believe that if the business is growing consistently, sooner or later, the stock valuations will revert to the historical means from low valuations. So far, these two strategies have outperformed the market by about 2% a year.

Among all strategies, Buffett-Munger portfolio has shown the most consistent performance. The Buffett-Munger Screener is used 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. They can maintain or even expand their profit margin while growing their businesses.
  3. Companies that incur little debt while growing business.
  4. Companies that are fair valued or undervalued. We use PEPG as indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past five years.
This portfolio has shown consistent performance. It has outperformed the market every year since inception. So far this year it is underperforming by about 2% because of one underperformer: ITT Educational Services Inc. (ESI).

As a group, these companies have done well. They may not have the market momentum with them, and they may face headwinds which bring the valuations low. But if business continues to grow, we believe it is safer to invest in these companies. Indeed, these companies have outperformed the market every year since inception.

These companies also outperformed the market by wide margins over a long period of time in our backtesting. For details, go to: What Worked in the Market from 1998-2008? Part II. Undervalued Predictable Companies and Buffett-Munger Screener.

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.

Rating: 5.0/5 (1 vote)


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