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What we're looking for
The best performing investing style of 2012.
To find what's in style, we turned to S&P Capital IQ, which tracks eight strategies or "style indicators," as it calls them. The winner so far this year is one based upon fundamental valuations, which has produced a 16.7 per cent return.
How it works
Jamie Hynes, sales director with S&P Capital IQ, screened the Capital IQ global database for Canadian stocks that ranked highest on six factors (three of which are shown here) that make up the Valuations Style Indicator:
-low share price to book value per share;
-low share price to free cash flow per share;
-low share price to forward earnings per share;
-low share price to earnings adjusted for estimated long-term earnings growth and dividend yield;
-high EBITDA (earnings before interest, taxes, depreciation and amortization) to enterprise value (a company's market capitalization plus net debt);
-low share price to operating cash flow (relative to companies in same industry).
In the accompanying chart, a stock's ranking on these factors is given in terms of percentiles of the S&P/TSX composite. A stock with a percentile ranking of 1 is in the top 1 per cent of the market for that criterion; one with a percentile ranking of 100 is in the bottom 1 per cent.
More about S&P Capital IQ
S&P Capital IQ offers a comprehensive set of tools for fundamental analysis of global securities, idea generation and workflow management. Its Web- and Excel-based platform provides access to both real-time and historical information on companies, markets, transactions and people around the world.
What we found
Many of the top 20 stocks in the valuations-based model have done poorly over the last year. This is typical of any value-based strategy – the stocks that are today's biggest bargains tend to be ones that have tumbled out of favour and are therefore cheap.
To make sure you're not buying a "value trap" that is cheap for a good reason, you should do your own research before buying any of the names listed here. You should also be prepared to be patient. While a value-based investing strategy has produced good results over time, no style is always in fashion.
Ian McGugan