# Low PE Portfolio Performance Study



## TabJockey (15 January 2011)

A few months ago I created an watchlist for myself of all the companies I could find that exhibited some qualities I was looking for.

These qualities where:

*Must be currently making a profit

*Must have a PE below 12, or have a 12 month projected PE below 10 that can be reasonably assumed with a margin of safety.

*Low PE must not be for an obvious reason, for example earnings in that industry are expected to decline, or legal cases against the company are ongoing.

*Must have average liquidity of $100k+ a day

*Upon inspect and research, Management must look reasonable.

*Must "feel" like a good investment.

So I came up with 23 stocks that I thought represented a good medium term investment and assigned $2000 to each one in the watch list.

My question for you guys is, how would you expect such a portfolio to perform in the short, medium and long terms?

When I started the virtual portfolio I expected that a few of the stocks would give tripple digit returns, which would probably be evened out by a few stocks going to 0. I would expect allot of the companies to give a 1 year return of perhaps 20-40%, but not as many to drop by that amount. So far losers to winners is 19-4. Perhaps its just a bullish period for small caps? (most of these are small caps, and none of the big caps have posted big gains)

I expected Beta to be high, because the portfolio is riskier than the market as a whole I expected higher volatility. The volatility is there but the beta is low, I have seen some huge gains on big red days for a asx200.

It has not been long enough to make any conclusions, but it will be interesting to see how it pans out after a year. If it was actually money invested I would be selling out on average after 12-18 months so.

So far averaging 3% a week, that's just holding not trading. Seems like a very good run and I would expect some negative action to even it out.

It feels like that with a portfolio like this, your downside is limited, say 2 companies goto 0. That's a 8% loss, and quite unlikely. But the upside outweighs and seems more probable than the downside. It is quite probable that in my portfolio of 23, 2 or more will double in SP in 12 months. If a silver mine is trading at a prospective PE of 4, and they will start production in 9 months, and silver is going up, a doubling of the SP in 12 months is a much higher probability than a company with no debt currently making a profit going to 0. As long as you research and do'nt put anything too speculative in there it seems like a great bet.

Sorry for rambling!


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## burglar (15 January 2011)

TabJockey said:


> Sorry for rambling!




I found it interesting from start to finish, but maybe that's just me! 
Sorry, I missed the part where you were rambling!


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## ParleVouFrancois (15 January 2011)

TabJockey said:


> A few months ago I created an watchlist for myself of all the companies I could find that exhibited some qualities I was looking for.
> 
> These qualities where:
> 
> ...




Interesting exercise mate, you could be onto something here . Is that 3% compounded over a few months or 3% on average overall for the 3 months? I find it strangely comparable to my performance (from October 1st 2010 till December 31st 2010 I returned 3.41% per week on average LOL crazy stuff). That does include some of my MHM returns though, very VERY unlikely to be repeated again. Out of curiosity, could you post the list of shares and results thus far? I've been having trouble finding "easy" investment ideas, and it might throw up a few companies I haven't had a look at yet, and allow for some real money to made out of your idea (if you haven't yet ).

PVF.


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## tech/a (15 January 2011)

Care to put up the start date and the 23 stocks so we can have a look and watch.

19/4 is an extremely high win rate over 3 mths on small caps.
Particularly buy and hold.

I personally would expect over an 18 mth period that some at sometime over that period would make 100s of %--it would be possible but unlikely that one would go to zero.

*Id expect that if not managed the portfolio would see more profit given back over years than kept!*


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## tech/a (15 January 2011)

Care to put up the start date and the 23 stocks so we can have a look and watch.

19/4 is an extremely high win rate over 3 mths on small caps.
Particularly buy and hold.

I personally would expect over an 18 mth period that some at sometime over that period would make 100s of %--it would be possible but unlikely that one would go to zero.

*Id expect that if not managed the portfolio would see more profit given back over 12 to 18 mths than kept!*


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## ParleVouFrancois (15 January 2011)

I swear I posted on this thread (must've not hit send LOL, a bit tired because insomnia is playing up again). Anyway an impressive performance thus far, strangely similar to my performance (you can check my blog for the official recorded one, up 41% during October 1st to December 31st, or about 3.4% per week on average), this does include some of my MHM gains which will most likely not be repeated, and no way do I think I can keep this up in the long run. 

I too would be very interested in having a look at the list of the companies you've found, I've hit a brick wall recently when it comes to finding fundamentally cheap companies in the smaller caps area that meet my criteria, maybe a few might be on this list of yours .

PVF.


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## TabJockey (15 January 2011)

BBX
BEL
CSV
DUE
LYC
EZL
IDL
NBL
ORI
REF
RHG
TLS
VMG
VRL
ABY
BTR
CFE
HZN
IMP
PAN
PEM
CCU
NAV
GDO
EKA
BKP
IBG
PRU

Copied from spreadsheet. Paper entry varies from 31st of Oct to 3rd Nov. Hasn't been long but the results have been knockout so far. 

Picking out the companies was not that hard, anyone with some time and an understanding of business could do a similar job, probably about 15 minutes research per company on average, this is not a lot.

Something tells me stellar returns cannot be that easy, either I have gotten very lucky with my picks, or the market loves small caps for the moment, and how long will that last?


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## TabJockey (15 January 2011)

ParleVouFrancois said:


> I swear I posted on this thread (must've not hit send LOL, a bit tired because insomnia is playing up again). Anyway an impressive performance thus far, strangely similar to my performance (you can check my blog for the official recorded one, up 41% during October 1st to December 31st, or about 3.4% per week on average), this does include some of my MHM gains which will most likely not be repeated, and no way do I think I can keep this up in the long run.
> 
> I too would be very interested in having a look at the list of the companies you've found, I've hit a brick wall recently when it comes to finding fundamentally cheap companies in the smaller caps area that meet my criteria, maybe a few might be on this list of yours .
> 
> PVF.




Ahh nice list, we share a few.

If I actually had money in it, what I would be doing is choosing very carefully when to buy. Ie not just buying in because they look "alright', but having a look technically and waiting for the right opportunity. One thing you notice with some of these small volatile ones is that if you dont get any news for a while, the stock will tank for no fundamental reason: this is a GREAT time to buy.

Also if you get slightly negative news, the market will completely overreact and you can see the price cut in half even those the earnings are only cut by 10%. Another excellent opportunity.

Often I would also sell after quite a short period of time ignoring tax considerations. If you buy at a PE of 6, and in a month its trading at a PE of 9, there is probably limited upside to be realised and it will trade flat, or down, in the short term. Sell at the fundamental high (no need to pick the exact) and lock in 30%.

Another thing I am learning to do is to wait for some technical action before entry. A company may be on track to earn 25% of its MC but it will likely trade flat if approaching a major hurdle. No use in tying up your capital in a technically uninteresting period. Its okay to miss the start of the rally as long as your alert enough to get in before the news is due.


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## tech/a (15 January 2011)

TabJockey said:


> BBX
> BEL
> CSV
> DUE
> ...




Hmm I see* 11 not* in profit. (higher than purchase price)
BBX
CSV
DUE
NBL
ORI
REF
UMG
BTR
HZN
GDO
VMG

I see 3 which* dont meet your $100K* a day Turnover.
BBX
BEL
REF

I see 6 which are within 5% of your rough purchase price (+).
PRU
IDL
URL
ABY
PAN
MAV

Actually there is 28 in the list.

Leaving* you 12 to return you 30%* ish.
Around 50% on each trade in profit of the 12
I cant make it work?


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## Noddy (15 January 2011)

List doesn't add up to me, must be reading the wrong thread.

Can find at least five that are not making a profit BBX,LYC,BTR,IBG,PRU as they are not recording a P/E in the AFR.

At least five are trading lower than 29/10 BTR,CSV,DUE,NBL,VMG.

Haven't checked all of them, but that's enough for me.


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## Tysonboss1 (15 January 2011)

BBX - I know the founder and largest share holder, I would not by this stock unless sombody was threatening to shoot a puppy. :ak47:


All the best though, it's just not one I feel comfortable with.


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## Wysiwyg (15 January 2011)

TabJockey said:


> *Copied from spreadsheet. *Paper entry varies from 31st of Oct to 3rd Nov. Hasn't been long but the results have been knockout so far.




Only a code list? No date of entry, entry price, quantity, P/E ratios or profit/loss data in the spreadsheet?


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## TabJockey (15 January 2011)

Sorry guys this is not a watertight academic effort, some of those are not well researched and I got a little lazy and started throwing in stocks that did not meet several of the criteria. Some I threw in because i had money in them at the time.

I just threw it together a few months ago for some interest. I must have got some calculations wrong or used bad data. Also remember that they where not all entered at the same time, or at closing prices.

Even though its a bit flaky it still stands as an example of the over performance of small caps in recent times. 

I will let you know how it looks after 6 months, andI will even keep BBX in just for fun


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## tech/a (15 January 2011)

Mate its not even close to your claim.
You wrote with conviction and authority--yet it was/is so far from reality--
You asked for opinion --- time wasting.

Another paper trading noob who thinks that in this game you can be "close enough"

You'll get spat out!


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## TabJockey (15 January 2011)

Ouch, chill out TA, hold that thought and in 3 months ill update you with some proper data.


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## tech/a (15 January 2011)

TabJockey said:


> Ouch, chill out TA, hold that thought and in 3 months ill update you with some proper data.




Ive saved the list as well.
As I said without proper trade/portfolio management it wont perform any where near expectation.


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## So_Cynical (15 January 2011)

Watchlists can be very interesting...ive only ever used the ASX ones as thats where my research starts, the ASX limits watchlists to 20 stocks and there's also a limit of 15 lists.

Now when i make up watchlists i always use the closing price and usually only enter stocks that meet my low entry criteria however will also usually add the sector heavyweights so i have a rough benchmark...i usually enter 100 shares for each stock so everything's even and can easily compare SP performance.

Anyway about 6 months ago when flicking thru them i noticed that i hadn't realised that they were almost all in profit...just went thru them again and all bar one are in profit some by more than 100% even the lists that are over 3 years old, pre GFC are in profit!


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## Tysonboss1 (15 January 2011)

So_Cynical said:


> Anyway about 6 months ago when flicking thru them i noticed that i hadn't realised that they were almost all in profit...just went thru them again and all bar one are in profit some by more than 100% even the lists that are over 3 years old, pre GFC are in profit!




that is pretty interesting, is that excluding dividends also.


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## TabJockey (15 January 2011)

So_Cynical said:


> Watchlists can be very interesting...ive only ever used the ASX ones as thats where my research starts, the ASX limits watchlists to 20 stocks and there's also a limit of 15 lists.
> 
> Now when i make up watchlists i always use the closing price and usually only enter stocks that meet my low entry criteria however will also usually add the sector heavyweights so i have a rough benchmark...i usually enter 100 shares for each stock so everything's even and can easily compare SP performance.
> 
> Anyway about 6 months ago when flicking thru them i noticed that i hadn't realised that they were almost all in profit...just went thru them again and all bar one are in profit some by more than 100% even the lists that are over 3 years old, pre GFC are in profit!




Yes! thats exactly what I have done, but it has not been running long enough yet. At the moment I dont diversify in my real portfolio, I have a handful of holdings that I think are the best investments I can come up with at this point in time, but often I have others that I think are almost as good, but I don't have the capital to allocate to them.

One thing I really want to look at over the next 6 months, is how a portfolio of 5 of my best picks compares in performance to a portfolio of ~25 of my best picks. Will I get a better result?

As TA has stated you would expect poor long run performance if you just held and did not actively manage the portfolio, but with a low fundamental entry I think a 6-12 month time frame might give some startling un-managed results.

Another thing I want to look at is how the performance of these companies compare to the wider market. A 20% return when the market has returned 15% is quite bad for the risk profile but does the portfolio hold up in a down trending market? They teach us in school that it should slide harder than the market but anecdotally over the past 3 years I have not seen that to be the case, I think because the fundamental cheapness of the stock puts a floor under the price that the market at large does not have.

What do you think? Am I talking out of my bum here?


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## So_Cynical (15 January 2011)

TabJockey said:


> One thing I really want to look at over the next 6 months, is how a portfolio of 5 of my best picks compares in performance to a portfolio of ~25 of my best picks. Will I get a better result?




Yes that's the kind of thing you should be doing, everyone one should be doing.



TabJockey said:


> As TA has stated you would expect poor long run performance if you just held and did not actively manage the portfolio, but with a low fundamental entry I think a 6-12 month time frame might give some startling un-managed results.




Some of my watchlists are over 3 and a half years old and are untouched, not edited and in profit....i don't really actively manage any of my lists, just make um and watch em.



TabJockey said:


> Another thing I want to look at is how the performance of these companies compare to the wider market. A 20% return when the market has returned 15% is quite bad for the risk profile but does the portfolio hold up in a down trending market? They teach us in school that it should slide harder than the market but anecdotally over the past 3 years I have not seen that to be the case, I think because the fundamental cheapness of the stock puts a floor under the price that the market at large does not have.




The wider market and biggish indexes just don't/cant move like individual stocks or even small groups of similar stocks....diversification flattens out portfolio performance while concentration has the opposite affect, my portfolio is somewhat diverse while also focused...the main thing i have working for my portfolio is that almost all the stocks were brought at low points in there price cycle.

Sounds sorta obvious but all my out performing stocks were brought very cheap and my under performers i paid to much for.


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## So_Cynical (15 January 2011)

Tysonboss1 said:


> that is pretty interesting, is that excluding dividends also.




Yep no dividends at all...i made most of the lists over a couple of days (per list) and in general have never managed them or edited them and always used the correct closing price..to be fair about 6 of those lists were made around the bottom of the GFC.


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