This Low Expectation Screen is Outperforming by 13% YTD


These stocks with low expectations is beating the market by 14% YTD. Quite impressive considering how the market is labeling each company as having no growth potential. Such low expectations can yield excellent results when the market comes to realize its mistake. Find out how this screen works and the backtest performance over several 3 year timeframes.


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Jae Jun

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Graham assigned a PE of 8.5 for Zero Growth Companies

According to Benjamin Graham’s formula from The Intelligent Investor, he assigned a PE of 8.5 to a company with zero growth. However, if you have used my stock valuation spreadsheet or read the article on how to value stocks using the Benjamin Graham formula, you would have noticed that I assign a PE of 7 for a no growth stock.

With that in mind, I wanted to know how a stock considered by the market to have no growth potential would perform.

If the PE is too low, then there is a high probability that there really is a fault with the business. But if the company is borderline, there is a good chance that the business is sound and healthy but just misunderstood by the market or affected by macro factors outside of the company’s control.

The PE range of No Growth Stocks

What I tried to do was to find that range of borderline no growth PE’s. Keep in mind that lower expectations make the upside return that much more impressive as David Dreman has emphasized heavily in his books.

Through trial and error, I found that a PE range of 7 to 8.5 yielded the best results, but to be certain that I was getting quality companies, I included an additional criteria of ROE greater than 13%.

With the addition of ROE, the results are very impressive.

Low Expectations Stock Screen Results

YTD the screen has returned a price return of 14.3% compared to 1.1% for the S&P500.

In a year where the majority of funds are under-performing, the screen selection is doing extremely well.

Here are the stocks that are being tracked from the beginning of the year.

As you can see from the list, the majority are all very well capitalized and healthy businesses, but the reason why I’m impressed with the results can be visualized from the performance graphs below.




Compared to my other stock screener backtest performances, the low expectations screen isn’t as explosive, but the stability and the downside protection this screen provides is very impressive.

Since a screen does not have any intelligence, if you were to monitor these stocks a little closer and sell when you felt it was becoming overvalued, I’m sure the results would be even better.

15 Stocks with Low Expectations but Ready to Break Out

Any of these companies catch your eye? Tell me in the comments below.

Disclosure: None.

  • Jordan

    Interesting screen idea! Just wondering, isn’t there some sort of inherent hindsight bias in selecting stocks that are expected to have no growth based on their current P/Es and then backtesting returns? In the base year(s), they probably didn’t fall into the “no growth P/E” range, so while this group has outperformed consistently in retrospect, does it necessarily mean stocks that currently fit the no growth P/E criteria will behave similarly going forward?

  • wsm

    “In a year where the majority of funds are under-performing…”

    Isn’t this impossible? By definition, isn’t it always the case that half of funds will out-perform their category avg, and half will under-perform?

  • Zach

    I’ve had GNK on my watch list because it had a very low P/B ratio of 0.2 and Morningstar has it rated at 4 stars with Fair Value Estimate of $10 with a consider buying recommendation of $5 and consider selling recommendation of $20. Another shipping company with a low P/B ratio, 4 stars and is undervalued is EXM

  • GCR

    I’d argue its impossible for the majority of funds to outperform. In aggregate they must achieve a market average return, subtract costs and the average fund will underperform.

  • num

    wsm:

    In the set {1, 1, 10}, more than half of the numbers are below average.

    Also, Jae did not specify “average fund performance” as the standard the funds are lagging behind.

  • Ron

    Isn’t this just like the Magic Formula stocks?

  • Theodor Tonca

    Very interesting Jae, good to see the wide range of diversity among the companies pertaining to industry.

    Perhaps a back test on small-mid caps with the same characteristics would be in order.

  • @ Jordan,
    In the test, there is no hindsight, survivorship or future bias. Just based on results at that particular point in time.

    @ wsm & GCR & num
    Just combining a quick response to all three of you guys.

    The majority of mutual funds do underperform due to all the fees they charge. At best they match the market.

    @ Zach,
    The entire shipping industry is very cheap at the moment. It has been for quite a while. Very cyclical and not my strong point. But the variety of companies in the screen make it appealing as an idea generator.

    @ Ron,
    Not really because Greenblatt uses ROIC (although similar to ROE) and he has his own ranking system that I havent figured out yet.

    @ Theodor,
    Good idea, but I dont think many will make the list. I haven’t seen too many small caps with a PE of 7-8.5 able to produce 13% ROE.

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  • Brajesh

    Love your sight.Read your blog postings every week. Where are you getting the growth estimates from. Thanks

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