Value investing has an illustrious history and is the philosophy of some of the most successful investors of all time, including Warren Buffett and John Templeton, to name a few.
The original practitioners pored over reams of corporate reports in search of stocks trading below intrinsic value. Now, some investors are streamlining the value investing approach with quantitative models and screens.
Andrew Wang manages the Systematic Value portfolio on Covestor that attempts to identify undervalued stocks using a mesh of quantitative and fundamental research.
Wang founded Pemberley Capital at Cornell University and incorporated the firm in 2009. He honed his quantitative skills as a portfolio manager and quantitative analyst at hedge funds.
“I learned the essence of quantitative investing and I had a financial engineering background from Cornell. But I was also intrigued by value investing and systematically finding value opportunities with the help of quant models,” said Wang, whose favorite investors include Buffett, David Einhorn and Seth Klarman.
In Systematic Value portfolio, he uses screens to identify potential investments, then conducts additional fundamental analysis, including financial strength and competitive moat, before making any purchases.
Currently, the portfolio is about 17% in cash, which Wang says is relatively high. He typically holds at least 20 stocks.
“In a value strategy though, you have to be willing to hold cash and save buying power for a potential correction,” the portfolio manager said. “There are signs that current stock valuations are stretched. It seems any company with a fairly good growth outlook gets a higher valuation – Tesla (TSLA) is an extreme example of this.”
Wang also discussed a few individual portfolio holdings to illustrate his philosophy.
One example is enterprise software giant Oracle (ORCL) which he says falls within the “old tech” bucket.
“Oracle is a traditional buy from my model’s perspective. The stock has a reasonable valuation. Oracle has dominant industry leadership, and has also captured the ‘big data’ trend even as an older company, so it’s a combination of growth and value,” Wang said.
Meanwhile, BP (BP) has found its way into Systematic Value portfolio for very different reasons.
“BP is more of a ‘special situation’ type of value stock because of the uncertainty related to legal issues the company is still facing. The stock has been punished but the company seems to be turning itself around,” Wang noted.
He also owns shares of the company led by one his favorite investors, Warren Buffett, through Berkshire Hathaway (BRK.B).
“Obviously, Berkshire is a go-to place for value investors, and it’s sort of like buying a diversified mutual fund because Berkshire invests in other companies,” Wang said. “I believe the stock is undervalued because investors are concerned Buffett can’t do big deals, and investors are also worried about his age. I believe Berkshire can be run without Buffett, who has given a lot of freedom to his managers.”
Finally, some investors may be surprised to learn he owns Apple (AAPL) in Systematic Value portfolio.
“It’s in there because Apple has industry leadership and it’s actually relatively cheap in the tech sector,” Wang said. “It has transformed from a leading growth company to more of Microsoft-type company – what I mean by that is they have a large customer base that relies on a platform they’ve built, and are unlikely to move to another platform. Apple also has a decent amount of cash on hand to buy back shares or acquire companies. Those could be strong catalysts, as well as potentially increasing dividends.”
DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
