One of the things I like most about my job is that I get to decide what I look at, research, and investigate, and because I get to do that in a dynamic environment, the only limitations are my imagination and ability.
I said recently that the more market changes in terms of participants, constituent stocks and trading technology, the more it stays the same, or at least that’s how it appears to me.
I thought I would test that statement by looking for interesting, value stocks and opportunities in what most people consider to be a growth market.
Value investing was popularised by Ben Graham and the two books he authored in 1934 (Security Analysis) and 1949 (The Intelligent Investor), the latter with David Dodd.
Old Fashioned?
Graham and his theories are said to have been the inspiration behind Warren Buffett's career in investing; however, it has become quite common to see videos on social media where a “finfluencer “ throws Graham's books into a bin, and goes on to extol the virtues of a growth stock, meme or AI-driven research platform.
All of which should be taken with a large pinch of salt, I think. Not least because of the existence of a chart like this, which shows the performance of Warren Buffett's Berkshire Hathaway B shares since 1997. Compared to the S&P 500, Nasdaq 100 and the Gold Spider ETF, the chart shows the percentage returns, and BRK.B is shown in black, and it has trounced the others.
Source: Barchart.com
With that in mind, I set out to discover if we could find value plays in this growth lead market.
To be clear, a value stock is one whose share price does not reflect its fundamentals. The implication here is that the market has mispriced or undervalued that security. The value investor takes positions in these types of stocks in the belief that the market will realise its mistake and reevaluate the stock and its pricing.
Looking for Value
There are many methodologies you can use when screening for value stocks, but I thought I should keep this simple, and that's exactly what I did. I generated a list of S&P 400 Midcap Stocks with some standard fundamental data, exported that into a spreadsheet, and asked the sheet's AI to calculate the percentage difference between the stocks' Enterprise Value and Market cap.
What I was trying to identify were stocks whose total worth was greater than their stock market value (share price times the number of shares in issue), and the size of that differential.
(I used Barchart.com for this, but you could just as easily use Trading View or another platform like Finviz to run the screen)
I then applied a filter to show me the top 10.00%, or if you prefer, the top 10.0% of stocks that had an EV larger than their market cap, a list that still extended to almost 100 names.
In terms of the range of the differences between the two values, they ran from +40.0% to almost +440.0%
A 100 stocks is too many to work with in one go, so I needed a way to shorten the list or make it more relevant. Which I decided to do this by looking at short-term stock price performance.
Here is a snapshot of part of the stock list, ranked by 5-day % change in descending order.
Three stocks stood out to me straight away because they had previously shown up in some of my other analysis: They are: RH US, GT US, and Four US.
RH is a home furnishings and lifestyle business, Goodyear Tire is one of the world's best-known tyre manufacturers, and Shift4 Payments is, as its name suggests, a payment processing platform.
Source: Barchart.com
Here are the year to date charts of these 3 stocks, and all three of them have seen their share prices pick up recently. Of course, this could be down to other factors, pure coincidence, or that other traders and analysts have been running value screens over mid-cap stocks.
I have highlighted potentail catalysts for change above the charts below. And it will be interesting to see if they continue to rally.
RH was recently upgraded by Goldman Sachs.
Source: Barchart.com
GT US has recently seen options activity with above average volume and directionally bullish trading in its call options
Source: Barchart.com
Four is in a sector with ongoing M&A. Sector peer PayPal has been approached with a takeover offer from rival Stripe and private equity firm Advent.
Source: Barchart.com
Of course, there are plenty of other stocks to look at, even in the truncated list above.
The column on the far right of the table “1m vs IDX” tracks the performance of the stocks against that of the S&P 500, a positve figure tells us it's outperformed, a negative number that it’s underperformed, over a 1-month period.
Other Metrics
XRAY US or Dentsply Sirona tops the table above in terms of its 5-day % change, but it also has the highest 1m vs IDX value (although I note that RH runs it a close second).That upside momentum is very evident in this 10-day chart, in which the stock is plotted against the S&P 500 and S&P 400 Indices in pink and orange, respectively.
Source: Barchart.com
On this evidence, it seems to me that value investing isn't dead, and that Ben Graham's ideas don’t belong in the bin; they just need to be adapted to work in today's trading environment.
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