British and German small cap indices have rocketed to new highs after reporting strong third quarter earnings, says this report from Reuters. European small caps have delivered better earnings beats and been the subject of more analyst upgrades recently.
According to the Reuters article, analysts at JPMorgan are factoring in the likelihood of more M&A activity, benefits of recovering economic growth and better yields for these stocks – and the potential for appreciation of nearly 40% due to the aforesaid factors.
But is there any value left on the table?
Maybe, because JPMorgan Cazenove analysts Eduardo Lecubarri and Patrick J Pitcaithly back-test their Benjamin Graham-inspired Sequoia investing strategy on European small cap stocks, and find it works rather well.
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JPM-Cazenove’s ‘Sequoia Screen’ looks at stocks neglected by the market even though they reported positive earnings growth in at least 8 out of the last 10 years. The stocks qualify as overlooked by investors if they carry a bearish IBES consensus recommendation of higher than 2.5.
The strategy is a variation of a Benjamin Graham principle that advocates buying stocks that have not fallen over 5% in more than 2 of the last 10 years.
(Read move about legendary investor Benjamin Graham at our resource page here)
(Read more about European stocks scanned by Morgan Stanley for meeting Ben Graham and Joel Greenblatt investing criteria here)
The Sequoia strategy has generally outperformed the benchmark index since its launch in 2008 as per the chart below. Back-testing also shows that the strategy works well across different time frames (short 1 year/medium 3 years/long 5 years), and that stocks making it through the screener also had a solid success ratio.
“Not only did our Sequoia strategy outperform when backtested in 2001, but it also identified a list of stocks that were more prompt to rise. While only 35% of the stocks in the MSCI Small Cap Europe index delivered positive returns in 2001, 63% of our Sequoia stocks did (with 75% and 90% of them making money in a 3Yr and 5Yr basis),” say the analysts.
European small cap stocks
Here are European small cap stocks meeting these criteria.
Summary Stats of Stocks Passing Our “Sequoia” Screen at Present — Screening criteria appear shaded