Both quality and deep value screens underperformed in February as markets recovered from a weak January and low quality stocks that had dropped off the most had correspondingly outsized gains. The big exception was Japan, where quality and value stocks had excess gains. PE multiple dispersion is still quite low on the S&P 500, and valuations are fairly high, so even if investors believe that stock picking strategies are well positioned and that value stocks will outperform going forward, it could be difficult to find them in the first place.
“The Greenblatt and Graham & Rea screens, which focus more on value but also include risk controls showed good performance in the UK but underperformed in most other regions, still managing good absolute returns,” write Societe General analysts Andrew Lapthorne and Georgios Oikonomou. “We still find it very hard to find any companies that pass our screens and we do not see any material change in the number of companies that pass them.”
Greenblatt long and long/short underperform the market
The Greenblatt screen follows Joel Greenblatt’s Magic Formula, which puts a premium on stocks with high earnings yield and return on capital employed (the magic formula buys the top 30, excluding foreign stocks, financials, and utilities). The long and long/short strategies both underperformed the market globally last month. Long/short performance was flat in Japan and up in the UK, but down in every other developed market.
In absolute terms, the Greenblatt long strategy was up 3.2%, long/short was down 1.8%, and short was up 5.1% against the benchmark’s 3.6% gain.
Graham and Bea screen in-line with Greenblatt screen results
The Graham and Bea screen, which looks for deep value stocks in the vein of Graham’s seminal book The Intelligent Investor, had essentially the same results as the Greenblatt screen, with its long and long/short strategies losing ground against the market and the short strategy rising slightly. It was also up in the UK, and roughly flat in other developed markets.
In absolute terms, the long strategy was up 2%, long/short was down 2.8%, and short was up 4.7% against the same benchmark’s 3.6% gain. The similar performance between the two methods isn’t surprising since they both aim to find value stocks, and value underperformed as a strategy because of macro effects effecting the market as a whole.