Best O'Shaughnessy Trending Value Investment ideas for 2023
This article unveils the most promising James O’Shaughnessy’s Trending Value investment strategies for 2023.
These top investment ideas will be categorized into:
- Global
- North America
- Europe
- Asia
Stay tuned to learn how to seamlessly integrate these ideas into your investment portfolio.
Firstly, let's delve into some essential background information.
Unlocking the Power of Trending Value
The Trending Value investment strategy thrives on two fundamental concepts:
- Identifying the most undervalued companies
- Selecting those with the highest stock price appreciation over the past six months
To implement this strategy, you would cherry-pick the top 10% most undervalued stocks based on the Value Composite Two indicator (also pioneered by James O’Shaughnessy) and then acquire the top 25 or 50 stocks with the most substantial price increases over the past six months.
Outperforming the Market by 10% annually over 45 years!
The Trending Value investment strategy has a track record of consistently outperforming the market by 10% each year during the 45-year backtesting period from 1964 to 2009.
Curious to get started? Get ready to implement trending value in your portfolio!
Demystifying the Value Composite Two Indicator
Value Composite Two is a valuation metric derived from six key ratios:
- Price to book value
- Price to sales
- Earnings before interest, taxes, depreciation and amortization to Enterprise value (EBITDA / EV)
- Price to cash flow
- Price to earnings
- Shareholder Yield (Dividend yield + Percentage of Shares Repurchased)
This indicator's effectiveness lies in its ability to identify undervalued companies based on diverse valuation metrics, such as cash flow, book value, sales, EBITDA, and cash returned to shareholders.
While this may seem complex, fear not. In the Quant Investing stock screener, all these calculations are done for you, making it simple to identify companies aligning with the Trending Value investment strategy.
Unraveling Momentum
The other component of the trending value strategy involves investing in companies with the most significant six-month stock price upsurge, commonly referred to as stock price momentum.
A momentum strategy entails investing in stocks that have experienced robust price appreciation over a specific period. Numerous independent studies have shown that stocks with high returns over the last three to twelve months tend to continue performing well.
However, it's important to note that the momentum strategy can be volatile. For instance, research by James revealed that investing in the top 10% of stocks with the highest 6-month price appreciation yielded a maximum of 175.2% in one year but also experienced the highest drawdown of -62.4%.
Ready to embark on this exciting journey? Seize the opportunity to integrate trending value into your investment portfolio now!
Harmonizing Momentum with Value
In his backtesting, James O’Shaughnessy found that by combining momentum and value factors, you can significantly elevate your stock market returns. This combined strategy is coined the Trending Value portfolio.
Here are Our Stellar Investment Recommendations
O’Shaughnessy’s Trending Value investment ideas
Here's a glimpse of the recommended criteria:
- Minimum daily trading volume of $100,000
- Minimum company market value of $200 million
- Top 10% Value Composite Two companies
- Financial statements updated in the last 6 months
- Results sorted by Price Index 6 months (Momentum) from best to worst
Excellent Trending Value Stocks Worldwide
Premium Trending Value Stocks in North America
Top-Notch Trending Value Stocks in Europe
Cutting-Edge Trending Value Stocks in Asia
Implementing Trending Value in Your Portfolio
Here's how you can integrate the Trending Value portfolio:
- Include only stocks with a market capitalization above $200 million
- Select the top 10% most undervalued companies using the Value Composite Two indicator
- Select the 25 or 50 stocks with the best six-month price appreciation – Utilize Price Index 6m
Don't miss out on this incredible opportunity to embrace trending value in your portfolio right away!
Implement the Trending Value Strategy in Your Portfolio
Let's dive into the step-by-step process of executing this strategy within your portfolio.
Implementing this strategy is straightforward. Here are the necessary steps:
- Select companies with a market capitalization above $200 million by entering 200,000 in the box labeled Market value (000).
- As the main factor, pick Value Composite Two from the options under Primary Factor, then use the sliders to select the 10% most undervalued companies, setting the range from 0% to 10%.
- Choose the countries in which you would like to invest from the list in the Countries box.
- Click on the Apply button to run your screen.
Click on the image to enlarge
Once you have your results, sort the companies by six months price momentum from high to low by clicking on the Price Index 6m column heading twice.
Identify the Best 25 or 50 Opportunities
After applying the aforementioned criteria, consider investing in the top 25 or 50 companies for your Trending Value portfolio.
Increasing the number of companies in your portfolio beyond 25 can reduce volatility and drawdowns, albeit at the expense of slightly lower returns, as illustrated in the table above.
Suppose you invested a total of $1,000 in the top 25 stocks of the Trending Value portfolio. In that case, it could potentially yield $6.9 million after 45 years, with a volatility of 17.44% and a maximum portfolio value drop of 50.55%. On the other hand, opting for 50 Trending Value stocks annually would lower volatility to 16.51% but yield slightly lower returns, amounting to $4.1 million after 45 years, a 40% reduction compared to the 25-stock portfolio.
Don't miss out on leveraging the Trending Value in your portfolio – get started now!
Summary and Conclusion
The Trending Value strategy is a straightforward approach that seeks undervalued companies experiencing upward stock price movement, reflecting its durability with an average annual return of 21.2% over 45 years.
Adopting historically successful strategies is pivotal for long-term investment triumph, and fusing undervalued stocks with robust share price momentum is a compelling avenue for surpassing market returns.
However, it's important to note that, like any investment strategy, while the potential rewards are enticing, it comes with its inherent risks.
The maximum decline in portfolio value observed was 50.5%, emphasizing the necessity of commitment to the strategy through market fluctuations – this resilience is truly the crux of success.
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