Bottom Quintile
When I first started this project I considered calling it Bottom Quintile, and only following the bottom 20% of stocks ranked by Price/Book value.
If I had to explain value investing in one number, it would be P/B. The Fama & French numbers speak for themselves. It would not be popular, but it might be effective.
P/B works not because it is the best valuation method. It works because it is the single best number to measure unpopularity with Wall Street. Look at any list of low P/B stocks, and you will find very few Wall Street favorites. In fact, you will find the exact opposite, the companies most hated by Wall Street.
Only one manager to my knowledge has ever tried this strategy. Don Smith & Co. had a great record for many years. Mr Smith died several years ago, and value investing has not worked for a long time, so assets are down to about $4 billion. They own interesting stocks, and I look at their portfolio every month for ideas.
Below, I tried to build the best portfolio from stocks under 1.7x book, roughly the bottom quintile.
What is immediately obvious is that low P/B forces you to be more aggressive. Their is no place to hide. Your choice is among risky alternatives. This portfolio would make it difficult to sleep, which might be exactly why it works.
Howard Hughes Holding - HHH - Smith folks think Ackman knows what he is doing
Algoma Steel - ASTL - A big restructuring that Smith folks believes in
PVH - PVH - a boring, but solid, fashion apparel maker
Borg Warner - BWA - plenty of upside to electric cars
Walgreens Boots Alliance - WBA - I still think Amazon should buy them
Albermarle - ALB - who wins, the big lithium guys, or the new little guys?
Heidrik & Struggles - HSII - solid, top corporate executive recruiter
Azenta - AZTA - a great story in biotech cold storage, a steal at 1.6x
National Fuel Gas - NFG - the NY regulators scare me, but the price is right
Titan International - TWI - wheels and tires for ag equipment, well run
Thor - THO - the best RV maker, but the retailers are a mess
Malibu Boats - MBUU - solid, conservative boat builder. lots of cash
Molson Coors - TAP - Canadian beer is a valuable franchise
Duckhorn Portfolio - NAPA - risky, but Select Equity own a chunk
Helerich &Payne - HP - always my favorite driller, technology leader
Matrix Service - MTRX - we need to fix our refineries
Corteva - CRTA - seeds are a great business, what a bargain at 1.5x
Mosaic - MOS - risky, but someday the Russians will crumble
Centerra Gold - CGAU - solid asset, good management
Kinross Gold - KGC - smart guys. some foreign risks