Bottom Quintile Capital Management ????
Maybe this is a simpler approach?
If I were 20 years younger, I would form Bottom Quintile Capital Management. I would only buy stocks ranked in the the bottom quintile when stocks are ranked by Price/Book Value (P/B).
Book value is an imperfect valuation method. However, P/B is the best
”one number” to measure how much Wall Street hates a stock. P/B is the number that Fama & French used in their academic work to create the highest returning portfolio.
Maybe this would be a difficult concept to sell to unsophisticated individual investors, but BQCM would be an easy sell to institutional investors. The Fama/French numbers sell themselves.
Does anyone else already do this? Yes, Don Smith & Co (checkout the portfolio on Whale) manages over $5 billion using this strategy. The founder, Don Smith, died a few years ago, but the firm lives on. He called the strategy “deep value” investing.
Compared to the portfolio I just built “bottom up”, we would lose some of the bigger cap defensive idea like Sysco, Tractor Supply and Devon Energy. Right now, it would be hard to find any technology or industrial companies for a pure low P/B strategy. On average the portfolio would have more financial leverage.
In short, we would lose a little quality and diversification, but we would have a simpler strategy to explain. It might be fun and educational to be an advocate for these “orphan” stocks.
The portfolio below is from a screen of all US/Canadian companies over $1 billion, with P/B below 1.5x, that is about 250 stocks from a universe of about 2500 companies.
The median P/B of the new portfolio is 1.06x, the median EV/EBITDA is 8.0x, the median market cap is a comfortable $5 billion.
My proposed portfolio for BQCM:
Tyson Foods
Nutrien
Lineage
Alexandria Real Estate
Eastman Chemical
Mohawk Industries
ConAgra Brands
Rayonier
Matador Resources
Ingredion
Alaska Air
Thor Industries
Post Holdings
PVH Corp
Graphic Packaging
Helmerich & Payne
Harly-Davidson
Neogen
Coty
Azenta