Investors Still Chasing Low Quality, But Graham Value In US, Japan

Investors Still Chasing Low Quality, But Graham Value In US, Japan

by Saul GriffithFebruary 07, 2014, 3:15 pm

The January sell-off exposed the fact that investors were still pushing money into low quality stocks compared to quality names.

“Despite the very weak market performance in the latter part of January, it was still the low quality names that showed the best returns overall last month, whilst managing positive absolute performance in many regions,” says a research report from SocGen analysts Andrew Lapthorne, Rui Antunes, John Carson, Georgios Oikonomou, Michael Suen and Josh Cherian. “Low quality did underperform during the market decline, as you would expect, but the extent of the “risk-off trade” was not enough to offset the strong outperformance of low quality earlier in the month.”

High quality vs. low quality stocks

The SocGen report analyzes the results of their popular investment screens applied to stocks in the developed markets. The analysts used the Merton model to screen global stocks in January and the chart below illustrates the point.

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SocGen’s value screeners

“The more value driven Greenblatt and Graham & Rea screens were also off in most regions. The Graham & Rea screen was down -2.3% globally, only showing positive performance in Japan (2%). The Greenblatt model had a wider decline overall (-4.3%) despite advancing 2.4% in the UK and 3.1% in Japan,” observe the analysts.

It is interesting that value-driven stocks in Japan have stood up to the selling pressure seen since the start of this year – investors seem to be bent on cashing in on the whopping 50%+ gains seen in Japanese stocks in 2013 as seen in the chart of the Nikkei 225 below.

Value names

Here ais SocGen’s list of companies appearing on the Graham & Rea and the Greenblatt Magic Formula screens:

Graham & Rea model

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Greenblatt’s Magic Formula

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Tobacco and activism on the Greenblatt list

Note the number of tobacco names that appear in the Greenblatt list. Reynolds American, Inc. (NYSE:RAI), Lorillard Inc. (NYSE:LO), and Altria Group Inc (NYSE:MO) appear at ranks of 2, 4 and 14 respectively.

Also note that Herbalife Ltd. (NYSE:HLF) appears at value rank 18, even though activist investor Bill Ackman would think otherwise!

On the flip side, Carl Icahn would likely be gratified to see Apple Inc. (NASDAQ:AAPL) (in which he has a $3B investment) right up there at rank 10.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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