Finding value stocks

Here’s an interesting interview with David Fondrie from The Heartland Select Value Fund (HRSVX ), a concentrated portfolio of deep value stocks. The deep value concept and their stock screening method is explained as:

We follow a deep-value strategy of investing in companies that are undervalued relative to their intrinsic worth. The stocks typically are attractively priced relative to their earnings, cash flows, and book values. While we don’t have absolute quantitative parameters, we generally screen for companies with market caps of at least $500 million, stock prices of less than two times book value, and 12-month forward price-earnings ratios of below 20.

Before we invest, we identify a catalyst for each stock, like a new product or a new management team. We buy stocks that are starting to turn around or suffering depressed valuations due to short-term problems.

This seems reasonable but the problem is in identifying the catalyst. For example Fondrie describes a mistake with an investment in AVX. The fund managers predicted increasing sales but sales declined two quarters in a row. These things happen to professional fund managers as well as to individual investors. Typically the results are more significant for the individual investor that for the fund manager, which is why I suggest passive investing (though I do supplement with high dividend (particulary REITs) and precious metal stocks.

One Response to “Finding value stocks”

  1. After many years in the stock market, where I’ve trebled my portfolio in 2 months and lost everything in 2 days, I find merit in both active and passive investing. I think you need to do both to outperform the market year after year. If you check my web site, you’ll see the products of an aggressive momentum short term strategy that almost doubles the initial investment every year. Yet, its tough to put all your eggs in 1 basket every couple of weeks and roll the dice. That’s why I also have a large part in a bonds mutual fund and in PR banks.

    As of lately, and before I stumbled on your excellent web site tonight, I’ve been seeing the light of high dividend investments that also beat the market. I’ve been backtesting a strategy where the companies my screen provides are held for six months and are also high dividend paying companies. Backtesting has been very successful and on 1/02/05 we’ll also include this portfolio in our website.

    Keep up the great blog.

    CAS