30 Deep Value Investment Ideas In A Time Of Over-Valued Markets by Tim du Toit, Quant Investing

My friend Nils Herzing (writes a great blog called Frenzel & Herzing Value Investment) and I were discussing deep value investment ideas (companies with an extremely low valuation) recently.

We were both of the opinion that, with a lot of markets world-wide hitting new highs, there are not a lot of deep value ideas around.

There must be deep value ideas somewhere

This got me thinking that in a few industries and countries there may just be a few interesting deep value ideas.

I thus started playing around with the screener to see if I can come up with a few ideas for you.

Best value ratio

I used Earnings yield (EBIT / Enterprise value) the Rolls Royce of valuation measures to look for ideas.

This is because it uses earnings before interest and taxes (EBIT) which is comparable across countries with different tax rates, and enterprise value calculated as (market value + debt – cash) which takes the capital structure of the company into consideration.

It is also one of the ratios Joel Greenblatt used in his Magic Formula investment strategy (see The Little Book that Still Beats the Market)

What to screen for

This is what the screen looks like:

  • All developed markets (countries)
  • 20% of companies with highest earnings yield (EBIT/Enterprise value)
  • Minimum trading value $20,000 per day. I kept this small as a lot of deep value ideas are small companies and the ideas are for your personal account.
  • Minimum market value $10 million. Also low to catch small deep value ideas
  • Sorted the output by earning yield

The screen looks like this

This is what the screen looks like:

deep value investment ideas

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An earnings yield of what?

As with any screen of this nature you will find outliers as shown in the image below.

deep value investment ideas

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These values are most likely due to an extreme event (special profit) or other factor, for example a lot of cash which reduces the enterprise value of the company substantially.

It’s interesting to note that there are mainly Japanese, South Korean and Australian resource companies on the screen.

Go to page 5

In order to start getting earnings yield values that look half way plausible you have to go to page five of the screener.

Here the earnings yield is still high but starts getting believable as you can see below:

deep value investment ideas

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Still a lot of Japanese companies in the screen and companies in struggling industries (oil and gas for example), which is exactly what you expect from this type of screen.

Adding quality

As you can imagine a lot of these deep value ideas are junk companies that you have to look at in more detail to see if the extremely high earnings yield is correct and why it is so high.

There is however a way to quickly and easily increase the quality of the investment ideas the screener comes up with.

Add Piotroski F-Score

Simply screen for companies with a Piotroski F-Score higher than 5 (best score is 9).

You can read more about the Piotroski F-Score here: This academic can help you make better investment decisions – Piotroski F-Score

You also do not have to use the Piotroski F-Score as the screener also has 22 other quality measures you can use, for example:

  • Gross Margin – Novy Marx
  • James Montier cooking the books score
  • Return on invested capital (ROIC)

You can see the definition of all the ratios and indicators in the screener glossary.

Piotroski F-Score better than 6

If you only select companies with a Piotroski F-Score higher than six this is what the screener comes up with:

deep value investment ideas

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As you can see here the ideas start getting interesting and there is a nice mix of ideas throughout the world.

15 more ideas

Below is the second page of the screen with 15 more ideas for you:

deep value investment ideas

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You can see the earnings yield is not nearly as high as the previous screen but the quality of the ideas you get are a lot better.

Please always do your own fact checking

As with all screens this is just a list of companies. Please do your own analysis and fact checking to make sure the company is correctly included in the list.

Your deep value analyst

Tim du Toit