A selective approach to value investing

What makes a stock appear cheap? Does it offer unrecognized potential value? Todd Bassion and Ned Gray offer insight into a critical part of the team's investment process.

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A selective approach to value investing

Todd A. Bassion, CFA
Portfolio Manager

Our valuation screens are run daily. Again, we’re screening on the cheapest 20% of stocks around the world. And then we use a next step which is called universe segmentation to help narrow down the high value names to look at within that screen. One of the interesting things about our screen is that 80–90% of the stocks repeat month to month, so you get very familiar with what’s in there. On top of that, we use universe segmentation where we segment every name in the screens into four categories. Those four categories are chronic underperformers, financials, long-term turnarounds, and short-term opportunities.

The chronic underperformers are your so-called value traps that we’re trying to avoid. Financials tend to bounce in and out of the screens constantly, so we focus our attention on financials on basically buying the best–in–class financial because every financial company on the planet, at one time or another, is going to be within our valuation screen. And the two biggest areas we focus our attention on is long-term turnarounds or short-term opportunities. And the difference is long-term turnarounds are names that slowly get cheaper and cheaper and cheaper over time; now all of a sudden they’re within that cheapest 20% universe, and we need to do some digging and figure out why they’re in there, why we feel they will no longer be in that screen.

Short-term opportunities are names that tend to dive-bomb within our screen from some sort of one-off event, like a pharmaceutical company missing a drug trial, and it’s really a matter of prioritizing our work. If we’re looking at something that’s a long-term turnaround, we know we have a lot more time to do work on it, whereas a short-term opportunity we’ll focus our attention and make sure all the work gets done in a timely fashion.

(On-screen text) What comes next?

Ned Gray, CFA
Chief Investment Officer — Global and International Value Equity

Identifying a value universe is simply the first step. While we think that value stocks have great potential to achieve our objectives, just because a stock is cheap doesn’t mean that it’s going to outperform. We have to understand why the stock is cheap in the first place and focus on those names where we think the opportunities, the internal inherent qualities of a company’s competitive position, far outweigh the risks that the market is currently discounting. That means understanding why the stock is out of favor, and why we think those individual inherent drivers will eventually come to dominate and bring the company back to fair valuation.


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