(This article appeared first on The Stock Market Blueprint Blog.)
In this edition of Watchlist Wednesday, we highlight five of the top stocks qualifying for the Value Composite #1 screen. This screen is discussed in the book "What Works On Wall Street" by Jim O'Shaughnessy.
Value Composite description
Value Composite #1 is a compilation of multiple value factors. In O'Shaughnessy's research, he found that there was an "ongoing horse race" between which single factors performed the best. Although stocks with the lowest price ratio always ended up as the best investment options, the best-performing price ratios continuously changed over various time periods.
This led O'Shaughnessy to build a "master value composite factor" that consistently outperformed any individual metric. Value Composite #1 is what he calls a "pure play" factor because it only accounts for balance sheet, income statement and cash flow metrics.
The stocks are equally weighted by the following ratios: price-book (P/B), price-earnings (P/E), price-sales (P/S), price to free cash flow and enterprise value to earnings before interest, taxes, depreciation and amortization.
Here is a breakdown of five stocks with the lowest value composite rankings as found on The Stock Market Blueprint. Each stock has had positive earnings and positive free cash flow over the last 12 months.
- Market capitalization: $52 million.
- P/E: 1.82.
- P/B: 0.14.
- P/S: 0.19.
- Price to free cash flow: 1.68.
- Enterprise value to EBITDA: -0.42.
- Closing price on Oct. 4: $1.44.
- Market capitalization: $77 million.
- P/E: 4.91.
- P/B: 0.57.
- P/S: 0.15.
- Price to free cash flow: 2.91.
- Enterprise value to EBITDA: 4.33.
- Closing price on Oct. 4: $3.95.
- Market capitalization: $171 million.
- P/E: 2.83.
- P/B: 0.72.
- P/S: 0.07.
- Price to free cash flow: 2.02.
- Enterprise value to EBITDA: 5.73.
- Closing price on Oct. 4: $19.06.
- Market capitalization: $103 million.
- P/E: 2.75.
- P/B: 0.29.
- P/S: 0.45.
- Price to free cash flow: 1.85.
- Enterprise value to EBITDA: -0.53.
- Closing price on Oct. 4: $2.28.
- Market capitalization: $1.98 billion.
- P/E: 7.31.
- P/B: 1.06.
- P/S: 0.13.
- Price to free cash flow: 7.17.
- Enterprise value to EBITDA: 3.59.
- Closing price on Oct. 4: $3.55.
Due to the nature of deep value strategies such as the Value Composite, average investors will find numerous reasons not to buy the above stocks.
Disciplined investors, on the other hand, will find success following such a simple investment strategy.
You can build your own portfolio using the stock screens on TheStockMarketBlueprint.com. Check out our Shadow Stock Portfolios to see real-world examples of implementing systematic investment strategies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Start aÂ free seven-day trialÂ of Premium Membership to GuruFocus.