How To Set Up and Manage a Deep Value Stock Portfolio (Simplified)

Johnny HopkinsPortfolio Management Comments

The Acquirer’s Multiple® - FREE Stock Screener

unlimited

We get lots of emails asking about the simplest way to set up and manage a deep value stock portfolio like mine, which I’m currently building (see below). To tell you the truth it’s really easy!

Here at The Acquirer’s Multiple we provide three deep value stock screens. We use The Acquirer’s Multiple® to select the stocks for our screens. The Acquirer’s Multiple® is calculated as:

Enterprise Value / Operating Earnings*

*The Acquirer’s Multiple® is different to EBIT and EBITDA as our operating earnings figure is constructed from the top of the income statement down. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

The Acquirer’s Multiple® was born out of the research conducted by Tobias Carlisle in his Amazon best-seller Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations which describes how companies with a low rank based on The Acquirer’s Multiple® may be undervalued.

How To Use The Screens For Your Deep Value Stock Portfolio

Unlike a lot of websites that provide stock screens we provide an evidence based strategy for managing your portfolio in order to take out the guess-work of when to buy and when to sell, in order to achieve optimum results.

The three deep value stock screens we provide include the The All Investable, The Small & Micro-Cap and The Large Cap 1000. We deliberately exclude utilities, financials, and stocks traded over-the-counter (OTC):

#1. The Best Performing Screen is The All Investable Screen:

The All Investable Screen is drawn from a universe comparable to the Russell 3000. We define this universe as the largest half of all listed companies. The All Investable Screen draws the 30 best stocks from this universe, some of which are included in the Large Cap 1000 universe. As at January 1, 2016, it contained stocks with a median market capitalization of $1.43 billion, the smallest had a market cap of $131 million. This universe gives the best balance of returns and ease of investability.

Our back-tested results show that over a full sixteen-and-a-half year period (January 2, 1999 to July 26, 2016), the All Investable Screen generated the highest total return, a (CAGR) of 25.9 percent per year.

#2. The Second Best Performing Screen is The Small & Micro-Cap Screen:

The Small and Micro Cap Screen is drawn from the universe of stocks that fall outside the All Investable universe. We define this universe as the smallest half of all listed companies. The Small and Micro-Cap Screen draws the 30 best stocks from a universe of the smallest stocks. As at January 1, 2016, the largest company in the universe had a market capitalization of $131 million, and the smallest had a market cap of $0.9 million.

Our back-tested results show that over a full sixteen-and-a-half year period (January 2, 1999 to July 26, 2016), The Small and Micro-Cap screen generated the second highest total return, a (CAGR) of 22.0 percent per year.

#3. The Third Best Performing Screen is The Large Cap 1000 Screen (FREE):

The Large Cap 1000 Screen is drawn from a universe comparable to the Russell 1000. We define this universe as the largest 20 percent of listed companies. The Large Cap 1000 draws the 30 best stocks from a universe of the largest stocks. As at January 1, 2016, the smallest stock in the Large Cap 1000 had a market cap of $2.94 billion.

Our back-tested results show that over a full sixteen-and-a-half year period (January 2, 1999 to July 26, 2016), The Large Cap 1000 Screen generated the lowest total return, a (CAGR) of 18.4 percent per year.

How to Set Up and Manage Your Deep Value Stock Portfolio

When to Buy Stocks

The first thing you need to do is pick the screen that you wish to use for your investing – For my portfolio (which I’m building), I use the All Investable Screen because it provides the best returns.

To get started, you scale in by buying two to three stocks each month, that have the lowest Acquirer’s Multiple, until you have 30 stocks in your portfolio.

When to Sell Stocks

The general rule is to wait twelve months and one day, to minimize tax:

  • If the stock has left the screen, whether up or down, then sell your stock.
  • If the stock remains in the screen, whether up or down, then hold until it leaves the screen, then sell.

There is one exception to waiting twelve months and one day to sell your stock and that is, just before the end of your twelve month holding period, if your stock it down and has left the screen, then sell the stock before the end of the twelve month holding period, to capture the short-term tax loss.

That’s it!

“Human Intervention Will Hurt Your Performance!”

Having said that, we get lots of questions like:

  • Buying all 30 stocks at the same time
  • Re-balancing more often (monthly, quarterly)
  • Hand-picking stocks out of a screen (instead of picking the cheapest)
  • Picking stocks from multiple screens
  • Holding more or less than 30 stocks

We recommend that you simply follow this evidence based strategy to achieve maximum results.

All Evidence Based Investing Strategies Underperform At Some Stage

It’s important to note that all evidence based investing strategies, including ours, go through periods of underperformance. Some investors ‘try/test’ a strategy and abandon it after one or two months if they’re not seeing optimum results. This is a mistake with any evidence based strategy. In order to achieve optimum performance it’s important to stick with your strategy through these periods of underperformance. Remember what Charles Munger said about living through draw-downs, market declines, and periods of under-performance:

“If you’re not willing to react with equanimity (evenness of emotions or temper) to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get… compared to the people who do have the temperament and who can… be more philosophical about these market fluctuations.”

To get started with your deep value stock portfolio, click here, Deep Value Stock Screens.

FREE Stock Screener

Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:

unlimited

Join 4,200+ others and subscribe to our articles: