The virtues of value investing were restored in 2022 when growth stocks were torn apart by the bear market that took much more pain than average S&P 500 (SPY) stocks. Unfortunately, that shift in strategy 3 exposes fatal flaws that can also hamper investment results. This article will share a proven strategy that solves these 3 problems, leading to vastly superior performance. Read on below for more….
Some people started to believe that value investing was dead.
Yes, that sounds extreme. However, for most of the past few years, the road to success in the stock market has been paved with buying growth companies, no matter how much momentum…no matter how high their PE nosebleed was.
I’m referring to every hot trend from electric vehicles to cannabis to 3D printers to Metaverse to (fill in the blank).
This growth-only blueprint seemed to negate the virtue of the classical value principles pioneered by Benjamin Graham (and his most famous student Warren Buffett), as these “for” investments have gravity-defying multiples.
Then came the 2022 bear market where growth stocks were torn apart (that’s a good description when you see the over 60% losses levied on the ARK Innovation ETF of growth stock poster Cathie Wood).
At the same time, value stock strategies proved their worth. Including our own strategy that even gained 9% this year. More on that later.
The rise of value strategies in 2022 led many investors to return to this fundamentally sound investment approach.
Unfortunately, newcomers are more likely to fall victim to 3 fatal flaws:
- Value Traps (where stocks go lower and lower)
- Classic value metrics no longer work
- Lack of timeliness worsens ROI
So what’s the solution?
Please give me a few minutes of your time so I can spell it out for you. This puts you in the best possible position to perform better in 2023.
This includes sharing details about our coveted Top 10 Value Stocks strategy that has averaged gains of +36.60% since 1999 (outperforming the S&P 500 by 5.4x over that trajectory).
First, let me tell you a little more about this computer-generated model. We then discuss how it solves all 3 fatal flaws of value investing.
That journey begins with a brief discussion of our quantitative ranking system; the POWR ratings.
If you’ve spent any time on StockNews.com, you’ve surely seen information about our exclusive POWR Ratings system. Indeed, these ratings help investors gain a distinct advantage over the market, as can be clearly seen in the performance chart below.
Where does the outperformance come from?
The POWR Ratings model is the most complete rating of a stock available to individual investors today. All in all, we look at 118 different factors of a stock before assigning an A to F rating.
Which 118 factors?
The simple answer is ONLY those that lead to more profitable stock selection. This is really like a DNA check of each stock down to the molecular level to value the stocks that are built to outperform.
Once that analysis of the overall POWR rating is done, we break down those 118 factors into 6 additional digits to rate a stock’s virtue on the following dimensions:
For those quick to draw, you’ve probably just found out that if you combine a strong overall POWR rating with a healthy Value score, you’re well on your way to picking the best value stocks.
Fortunately, that process will get you started in the right direction.
Unfortunately, you still get a list of over 700 stocks to research.
That’s not too bad if picking stocks is your full-time job. However, for most of you, that is way too time consuming.
This led to one “Aha!” moment.
What if we could develop a strategy to find the top 10 value stocks that deliver consistent outperformance at any given time?
So we went back to the same data scientist who created the POWR assessments and asked the seemingly impossible: Could he increase the volume of the value metrics and somehow outperform their already market-leading returns?
After months of research and rigorous testing, the Top 10 Value Stocks strategy was born.
We haven’t limited ourselves to just 10 value stocks. But we’ve also significantly improved performance to +36.60% per year since 1999.
The hallmark of this screen is a diligent focus on the 31 individual value factors that help consistently discover the best value stocks in the market (and, just as importantly, ignoring the hundreds of factors that actually don’t work at all!).
By optimally combining these 31 unique value factors, this incredibly consistent winning strategy comes to light.
The key word is “consistency”
That’s because the POWR Ratings also focuses on the consistency of growth. Not only profit growth, but also improvements in turnover, profit margins and cash flow.
Next, our rating model takes a closer look at a stock’s quality by digging deeper into key metrics that reflect the health of operations over time.
The steps mentioned above solve the #1 fatal mistake of value investing. That’s how you can avoid the value traps that are really just badly run companies going from bad to worse. The focus on growth and quality aspects are the best possible health checks to alleviate these problems.
This means that we look beyond the overly simplistic measures of value used in the past, enabling us to bring you the healthiest growing companies that happen to be trading at attractive discount prices.
Next, we need to tackle the 2nd fatal error. That is, most of the classic value metrics don’t work the way they used to.
Computerized trading now dominates the investment landscape. It is no longer seasoned asset managers who make the decisions. Instead, the vast majority of transactions are executed by these quantitative models.
This has been the case for more than 10 years. And billions of dollars really have been thrown at these quantitative models to squeeze out every last drop of profit hidden in stocks.
So long ago these models took advantage of the typical value approaches like PE, book value, PEG, price to sales etc.
Now, after years of large-scale trading in these models, you could say that the value has dried up well.
More precisely, the best value metrics have little benefit in themselves. So the key to success is to stack as many of these stats in your favor as possible. Like the 31 value metrics in the POWR Ratings model.
Those are 31 advantages that work in your favor to generate outperformance. Each of them increases the chance of success. And this is how the Top 10 Value Stocks strategy can deliver an annual return of +36.60%.
Finally, we will discuss the 3ed fatal flaw, which is that value stocks are generally not current, hurting your ROI.
Value is considered a contrarian investment style. That’s because you’re betting on companies that are currently out of favor in the hope that the stock price will turn around.
Unfortunately, the longer it takes…the more it hurts your Return On Investment.
Fortunately, the POWR Ratings focuses on 25 different factors that greatly increase stock timeliness and ROI.
13 sentiment factors
12 Momentum Factors
Sentiment factors track what the smart money is doing with the stock, such as institutional ownership, Wall Street analyst estimates, and insider buying. These are time-tested ways to find in-favor stocks in a timely manner.
The next step is to narrow down 12 different Momentum factors that target stocks poised to rise. Momentum is indeed just like physics true”a body in motion… stays in motion”.
All in all, the POWR Ratings applies 118 factors to find the best stocks. The combination of these really helps to overcome the 3 fatal flaws of value investing.
We then choose value attributes to create the Top 10 Value Stocks strategy that boosts performance to an amazing +36.60% per year.
This is how you solve the 3 fatal mistakes of value investing.
And this is the consistent path to finding the best stocks in the future…
One last improvement
Because as great as the Top 10 Value Stocks strategy may be, there is still one glaring flaw in all quantitative systems. And that is understanding the most important WHY behind which stocks to buy and when to sell to maximize profits.
That’s why I’m going a step further and using my 40 years of investing experience to dive deeper into each stock, pulling back the curtain on the all-important qualitative metrics that no computer rating system can reveal.
The final result is the very best stocks, which I hand-select for subscribers to our popular POWR Value Newsletter.
This is truly a ‘best of both world’ solution:
+36.60% annual return from Top 10 Value strategy
Steve Reitmeister with over 40 years of investment experience with a keen eye for uncovering hidden value stocks
POWR Value Newsletter to help you discover the best value stocks for the current market.
What to do now?
To see more high-value stocks, check out our free special report:
7 SERIOUSLY undervalued stocks
What makes these stocks great additions to any portfolio?
First, because they are all undervalued companies with exciting upside potential.
But more importantly, they are all top Buy stocks according to our coveted POWR Ratings system.
Click below now to see these 7 great value stocks with the right things to outperform in the coming months.
7 SERIOUSLY undervalued stocks
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
Editor of Reitmeister Total Return & POWR value
SPY shares fell $0.15 (-0.04%) during after-hours trading on Friday. Year-to-date, SPY has gained 7.82% versus a percentage increase of the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investing experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.
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