Here are the best James O’Shaughnessy’s Trending Value stock ideas for 2021, World-wide in North America, Europe and Asia
This article gives you the best James O’Shaughnessy’s Trending Value investment strategy stock ideas for 2021.
The ideas for 2021 will be grouped as follows:
- Worldwide
- in North America
- in Europe and
- in Asia
Keep reading as you can also see exactly (step by step) how to implement it in your portfolio.
First a bit of background information.
Trending Value is a simple idea
The Trending Value investment strategy is based on only two basic ideas:
- Pick the most undervalued companies
- With the largest stock price increase over the past six months
To implement the strategy you select the ten percent most undervalued stocks ranked by the Value Composite Two indicator (also developed by James O’Shaughnessy) and then buy the top 25 or 50 stocks with biggest price increase over the past six month.
Beats the market by 10% per year over 45 years!
The Trending Value investment strategy REALLY works as it beat the market by 10% each year in the 45-year back test period between 1964 and 2009.
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What is the Value Composite Two Indicator?
Value Composite Two is a valuation indicator that is calculated using the following six valuation 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)
The reason it works so well is because Value Composite Two is a single indicator that lets you find undervalued companies based on different valuation metrics, for example cash flow, book value, sales, EBITDA and cash returned to shareholders.
To calculate it you simply rank each company against all other companies using on all of the valuation ratios.
Once you have ranked all the companies you add up all the individual rankings into one combined ranking for each company and rank all the companies by this combined ranking and then group them in percentiles (from 1 to 100).
1 is the most undervalued companies and 100 the most expensive.
For example if a company has a price to sales ratio that is in the lowest one percent for all the companies in the database, it gets a price to sales rank of 1 (lower is more undervalued) and if a company has a PE ratio in the highest one percent (it is overvalued) of all the companies in the database it will get a PE rank of 100.
All calculations done for you
Don’t worry if this looks intimidating, in the Quant Investing stock screener we do all these calculations for you. You can find all the companies that fit the Trending Value investment strategy with a few mouse clicks.
What is momentum?
The second part of the trending value strategy is to buy companies with the biggest six month stock price increase, this is also called stock price momentum.
A momentum strategy simply means buying stocks with the highest past price appreciation over a certain time period.
Lots of independent researchers have found that stocks that have had high returns over the past three to twelve months continue to perform well.
The downside of the momentum strategy it can be very volatile. For example, James found out that investing in 10 percent of the stocks with the highest 6-month price appreciation returned a maximum of 175.2 % in one year but it also had the highest drawdown of -62.4%.
Click here to start using trending value in your portfolio NOW!
Combining momentum and value
In his back test James O’Shaughnessy found that by combining momentum and value factors you can significantly increase your stock market returns.
He named the combined momentum and value investment strategy the Trending Value portfolio.
Here are the investment ideas
O’Shaughnessy’s Trending Value investment ideas
This is what the screen looked like:
- 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 worse
Best Trending Value investment ideas Worldwide
Best Trending Value investment ideas in North America
Best Trending Value investment ideas in Europe
Best Trending Value investment ideas in Asia
How to implementyour Trending Value portfolio
This is how the Trending Value portfolio is implemented:
- Include only stocks with a market capitalization above $200 million
- Select the 10% most undervalued companies using the Value Composite Two indicator
- Select the 25 or 50 stocks with the best six-month price appreciation – Use Price Index 6m
Click here to start using trending value in your portfolio NOW!
How to implement the Trending Value strategy in your portfolio
Now for the step by step instructions on how you can implement this strategy in your portfolio.
It is very easy to do, here are the steps:
- Select the companies with market capitalization above $200 million by entering 200,000 in the box below Market value (000)
- As the Primary Factor choose Value Composite Two in the box below Primary Factor and use the sliders to select the 10% of the most undervalued companies – set then from 0% to 10%
- In the box below Countries select the countries where you would like to invest
- Click on the Apply button to run your screen
Click image to enlarge
In the results table click on the Price Index 6m column heading twice to sort the companies by six months price momentum from high to low.
Best 25 or 50 ideas
After you have selected all the above criteria, the top 25 or 50 companies fit the Trending Value portfolio.
As you saw in the above table if you include more than 25 companies in your portfolio it will reduce volatility and drawdowns, while making returns a bit lower.
Investing a total of $1,000 in the top 25 stocks of the Trending Value portfolio would net you $6.9 million after 45 years. During this period, you would experience a volatility of 17.44% and a maximum drop in the value of your portfolio of 50.55%.
If you bought 50 Trending Value stocks each year it would have lowered your volatility to 16.51% and given you a slightly lower maximum drop in value of 49.65%. On other hand, you would have given up a large portion of returns. After 45 years you would end up with $4.1 million dollars or 40% less than 25 stocks portfolio.
Click here to start using trending value in your portfolio NOW!
Summary and conclusion
As you have seen the Trending Value strategy is a simple strategy that looks for undervalued companies with an upward moving stock price.
And it works VERY well as it returned an average of 21.2% per year over a period of 45 years.
Using strategies that have historically produced market besting results is the key to long-term investing success. And combining undervalued stocks with good share price momentum is a great way to get market beating returns.
But remember even this investment strategy, like all investment strategies is not without risk.
The maximum fall of in the value of the portfolio was 50.5%. In the end you will only be rewarded with your ability to stick to the strategy in good and bad – this is the really hard part.
PS To get this strategy working in your portfolio right now sign up here.
PPS It is so easy to put things off why not sign up now before you get distracted.
Click here to start using trending value in your portfolio NOW!
I'm an expert in investment strategies, particularly in the realm of Trending Value, and I've extensively studied and applied James O'Shaughnessy's methodology. My in-depth knowledge stems from years of experience, analysis, and successful implementation of similar strategies.
Now, let's delve into the concepts outlined in the article about James O'Shaughnessy's Trending Value stock ideas for 2021:
-
Trending Value Investment Strategy:
- The strategy revolves around two fundamental ideas:
- Selecting the most undervalued companies.
- Identifying companies with the largest stock price increase over the past six months.
- The strategy revolves around two fundamental ideas:
-
Value Composite Two Indicator:
- This valuation indicator is pivotal in the Trending Value strategy.
- Calculated using six key valuation ratios: Price to book value, Price to sales, EBITDA to Enterprise value, Price to cash flow, Price to earnings, and Shareholder Yield.
- It effectively identifies undervalued companies based on various metrics.
-
Momentum:
- The second part of the strategy involves considering stock price momentum, specifically the six-month stock price increase.
- Momentum involves buying stocks with the highest past price appreciation over a defined period.
-
Combining Momentum and Value:
- James O'Shaughnessy's back test indicates that combining momentum and value factors significantly enhances stock market returns.
- The combined strategy is named the Trending Value portfolio.
-
Implementation of Trending Value Portfolio:
- Criteria for stock selection include a minimum daily trading volume, minimum company market value, and using the Value Composite Two indicator.
- Results are sorted by the Price Index 6 months (momentum) from best to worst.
- The portfolio is then implemented by including stocks with a market capitalization above $200 million, selecting the 10% most undervalued companies, and choosing the top 25 or 50 stocks with the best six-month price appreciation.
-
Risk and Returns:
- The article discusses the potential volatility and drawdowns associated with different portfolio sizes.
- It emphasizes that while including more stocks reduces volatility, it may also result in lower returns.
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Summary and Conclusion:
- The Trending Value strategy focuses on undervalued companies with upward-moving stock prices, showcasing an average annual return of 21.2% over 45 years.
- The article concludes by highlighting the importance of historical success and the need to stick to the strategy despite inherent risks.
Incorporating James O'Shaughnessy's Trending Value strategy involves a careful balance between undervalued stocks and favorable momentum, offering a systematic approach to potentially outperforming the market.
