2022: A year in successful screens

I hope everyone had a great Christmas and managed to get a welcome break from the cut and thrust of financial markets. This week I am going to take a look back at the value screens I have developed this year.

But before I dive into that, my holiday reading included the following study by Robeco, which contained some interesting charts that backed up the arguments I made in my recent article,  A look back on 2022 through a value investing lens, and I thought it worth sharing those:

Assertion 1 – Value has a long way to run, particularly in small and mid-caps

Using the Value Rank, I showed the supposed rotation to Value seen so far has only really been seen in large caps in certain industries. Looking at global equity markets and using their own measure of “enhanced Value factor”, Robeco find that value stocks remain very cheap relative to history:

If history is any guide, this is the start of a return to Value, not the end, and the underperforming small and mid-caps are likely to catch up.

Assertion 2 – Value isn’t just a rising interest rate play

Here Robeco plot the monthly returns to their Value factor versus the change in long-term interest rates:

Although there has been a weak correlation over the last five years, the correlation is close to zero over the long term. This backs up my theory that this supposed link is a recent narrative that has been added afterwards to justify a bubble in unprofitable tech stocks rather than a permanent feature of equity markets.

The Guru Screens

The performance of the Stockopedia Value Investing Guru Screens backs up this as not being a great year for Value, whatever the headlines. The YTD performance here ranges from -7% to -52%, despite many of these having Super Stock or Contrarian style designation. Many of these screens only have a small number of hits, making this comparison moot. However, even a screen such as the Benjamin Graham Deep Value Checklist, which has 50 stocks, is down 22% YTD:

The performance of this particular screen was hampered by a larger number of its constituents being property-related. The start of 2022 was too early to consider these as value purchases.

Many other guru screens struggled in 2022. The best-performing Quality Investing Screen was the Piotroski High F-Score Screen, which is down around 14% YTD.

Even the normally mighty Screen of Screens struggled, down 22%.

So this really hasn't been a year to simply buy all the results from a guru screen.

My Value Screens

My value investing screens were never about buying the whole set of stocks but using screens for idea generation. I like to view screen results as the input to the funnel that may eventually lead to a stock purchase:

These were the screens I developed during the year:

52-week Low

The first value screen I introduced in July was a classic: 52-week Low. After an initial look into these companies, 11 made it onto my watchlist. In order to see how these have performed, I created an equal-weight portfolio based on investing at the end of July, when I published these articles.

After slight underperformance at the start, which is often the case when selecting stocks at 52-week lows, this catches up and slightly exceeds the FTSE Allshare. However, again this is hampered by being a largely small cap selection of stocks.

In terms of contributors to performance, Wentworth Resources (LON:WEN) was the standout since this received a takeover offer in the period.

Inland Homes (LON:INL) and Angling Direct (LON:ANG) were the laggards, and both had profit warnings in the period. All of the companies still look good value. With an average P/TBV of 1 and an Earnings Yield of 27% (excluding Logistics Development (LON:LDG) for whom an earnings yield is not a good measure.)

Price to Tangible Book Value

Only four companies made it onto my watchlist from my P/TBV screen. As a portfolio, these have underperformed the FTSE Allshare. However, with only four components, this is largely by chance:

Helical (LON:HLCL) did most of the damage, as sentiment towards London office property soured further. The company's results to 30th September showed strong rental performance and flat asset value, which means this drop appears to be largely sentiment driven.

Earnings Yield

This screen produced 11 stocks for my watchlist. Less than four months isn’t really enough time to judge this strategy. However, this is following a similar pattern to many stocks – a drop with the wider market but a failure to bounce back to the same extent:

MJ GLEESON (LON:GLE) has been the weakest performer, again on property woes. Sanderson Design (LON:SDG) and James Latham (LON:LTHM) have both done well since being added to my watchlist. Sanderson Design announced reasonable Half Year Results plus a licensing deal which helped the stock to bounce back. Latham's Half Year Results were mixed, with revenue up but profits down.  However, the stock bounced from an oversold position anyway as the market recognised that this continues to be a well-run business. 

Income Screens

While I was critical of a pure income strategy, in October, I found that a value strategy could easily be adapted to generate a high income and a high return. I generated two screens. The first goes after the highest yield; the second sacrifices a small amount of yield for greater diversification. If it were my own money, I would go for the latter. After all, the overall expected return should be similar even if less of that return is coming from income, and the added diversification is valuable. This is intended to be a relatively maintenance-free portfolio with rebalancing every one to four years, so two months of performance means very little. However, nothing so far suggests this strategy won’t achieve its aim.

Although this was intended to be a diversified strategy not requiring deep stock-specific research, a high dividend yield can also signal undervaluation. I looked at one such income stock, Somero Enterprises (LON:SOM) , in more detail.

Quality Screens

As well as these deeper value screens, I also generated some more quality-orientated screens. First using the principles of Buffett and Munger, and then the 100 Baggers book. This enabled me to develop a framework to assess these stocks further based on Moat, Runway, Operational Leverage and Cheapness.

This style of investing requires a much higher level of detailed analysis than a more deep value style where the value proposition (plus the issues with the company) tend to be more obvious. Both styles of investing are hard (they must be for investors to expect to generate outperformance). However, deep value is much harder psychologically, and quality investing is much harder analytically. As a follow on, I looked at two stocks in more detail: Luceco (LON:LUCE) Focusrite (LON:TUNE) . The Stock Pitches are here, here, and here. And my framework identified several more companies that may warrant further investigation: Polar Capital Holdings (LON:POLR) Best Of The Best (LON:BOTB) M Winkworth (LON:WINK) 888 Holdings (LON:888) Tremor International (LON:TRMR) CMC Markets (LON:CMCX) Forterra (LON:FORT) Jupiter Fund Management (LON:JUP) Creightons (LON:CRL) Ferrexpo (LON:FXPO) .

My final assertion from my look back on 2022 through a value investing lens was that 2023 would be a stock-pickers market. The odds are that Value as a factor will continue to show strength. However, as 2022 showed, buying a large set of value stocks based purely on the numbers may not be the optimal strategy. Despite this, the Stockopedia Screening tools remain a brilliant resource for identifying potentially undervalued stocks to research further.

Wishing you a Happy New Year and successful stock-picking in 2023.

[Disclosure: Mark owns shares in Capital (LON:CAPD) Goldplat (LON:GDP) Luceco (LON:LUCE) National World (LON:NWOR) Sanderson Design (LON:SDG) Somero Enterprises (LON:SOM) Zytronic (LON:ZYT) ]