The Ultra-Value Investment Portfolio

The purpose of this blog entry is to run a simulation of value stocks.  Being a CFA candidate as well as an avid investor, I have always been more of a value investor rather than a growth investor.  I have always believed in the principle that many financial markets obey certain laws that that, ultimately, all values converge towards the median.  This is especially true with the law of large numbers, the more stocks we include in a portfolio, the more likely the portfolio as a whole will converge towards equilibrium.

Many years ago, I had the opportunity to test this theory with a stock simulation program which allowed you to test a portfolio against other participants.  Since I was studying portfolio management, I wanted to test the theory that a value portfolio using stocks that had very low P/E ratios can outperform most of other portfolios.  By looking at a list of stocks and selecting the lowest P/E stocks, I was in fact able to outperform as many as 95% of my peers in the simulation.  A great deal of time has passed and we have a great deal of additional information available to us in which we can not only reach out to a wider equity market, but we can also gather more information in order to test theories.

The Ultra-Value Investment Portfolio

What I wanted to do was run a simulation of a portfolio which was made up of value stocks were both cheap in terms of earnings, but still robust enough to survive.  The Portfolio was going to have a value of approximately $100,000.00.  Since I had no preference over any stocks I wanted to weigh them all equally.

The parameters were as follows

1/ The P/E (Price Earnings) ratio had to be low.  In this case, under 15
2/ I wanted to avoid extremely speculative stocks and wanted to focus on small cap stocks which I believe would have the potential to grow faster.  The Market Caps I selected were both small and Micro.  This would include companies with a Market Capitalization between $20 Million and $300 Million.
3/ the stocks had to be financially robust with a viable asset base and no crippling debts.  I would only include stocks which had a Quick Ratio (Current Assets over Current Liabilities) over 1.
4/ the stocks had to trade on the NYSE

When I ran the values in the stock screener I was given 15 stocks.  I figured that this would be an acceptable number since it would be diversified enough to reduce any company specific risk that might exist in the portfolio.

The stocks, in order of rising P/E ratios were as follows.

Ticker	Company	Industry	Country	P/E
BORN	China New Borun Corporation	Beverages - Brewers	China	1.22
ZA	Zuoan Fashion Limited	Textile - Apparel Clothing	China	1.74
XNY	China Xiniya Fashion Limited	Textile - Apparel Clothing	China	2.29
CGA	China Green Agriculture, Inc.	Agricultural Chemicals	China	2.3
SRI	Stoneridge Inc.	Auto Parts	USA	3.79
TGS	Transportadora de Gas Del Sur S.A.	Gas Utilities	Argentina	5.93
BTH	Blyth, Inc.	Personal Products	USA	7.11
STV	China Digital TV Holding Co., Ltd.	Application Software	China	9.08
GGS	Global Geophysical Services, Inc.	Oil & Gas Equipment & Services	USA	9.42
KAI	Kadant Inc.	Diversified Machinery	USA	9.46
CO	China Cord Blood Corporation	Medical Laboratories & Research	Hong Kong	9.74
UFI	Unifi Inc.	Textile Industrial	USA	12.2
CFI	Culp Inc.	Textile Industrial	USA	12.7
REX	REX American Resources Corporation	Specialty Chemicals	USA	13
ARSD	Arabian American Development Company	Chemicals - Major Diversified	USA	14.4

This represented 8 stocks in the United States, 7 in China (including Hong Kong) and 1 in Argentina.   Even though it should be no surprise that the majority of the stocks were in the two largest economies in the world which together account for approximately 31.4% of global GDP, I would have preferred more geographical diversification.  There was some more variation in terms of industries but one can see that the textile industry weighed heavily with 26.66% of the portfolio being textiles.  This should come as no surprise since the Textile industry, as well as the energy and oil and gas industry, are traditionally value stocks.

Having created my portfolio, I will now monitor it and see how it performs relative to the broad market.  Over time I may choose to eject stocks that have a P/E ratio which rises above the 15 threshold in order to preserve the initial parameters.

I would like to add that this portfolio is purely an academic exercise and is in no way an attempt to sell any of the stocks mentioned above.  Over time I hope to gain insight as to how such a portfolio would perform in the market.