• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Financial Services

My 'Double Cheap' Portfolio Looks Good

These underpriced stocks have averaged 17% annual returns since 1999.
By TIM MELVIN Apr 13, 2016 | 02:00 PM EDT
Stocks quotes in this article: CMA, PRU, NWLI, UNM, AEL

I recently back-tested a portfolio of "Double Cheap" stocks and found that they outperformed the market fairly strongly over the long term, averaging a little over 17% annually since 1999.

These are stocks that trade at low multiples to book value, as well as at low enterprise value to earnings before interest and taxes (EV/EBIT). I've written about "Double Cheap" stocks before, but haven't tested this system in a while.

To make sure I just looked at undervalued-but-solid companies that have a decent chance of recovery, I only included those than earn a Piotroski F score of 5 or more. And since this is a "cigar-butt approach," I rebalanced my "Double Cheap" portfolio every quarter to take profits on those stocks that had recovered to trade at more-reasonable valuations.

As noted above, back-testing this screen produced strong results. The portfolio's worst period was in 2015, when it would have included a lot of energy stocks that looked cheap but got a lot cheaper.

The portfolio has held 78 stocks on average over the time period I back-tested. But like so many value portfolios out there, the number of stocks that pass the screen can serve as a pretty good indicator of market conditions.

If more than 100 stocks make the list, it's time to sell all of your possessions, borrow as much money as you can and use it all to buy stocks. But when the screen turns up less than 50 names, it's time to sell your equities and take a little vacation until more value emerges.

Right now, just 38 stocks make the cut:

Of course, the small number of stocks that pass the screen isn't shocking given the seven years of rising U.S. equities prices that we've seen. (It also reinforces my caution about being fully exposed to stocks these days.)

As for what market sectors currently make up the "Double Cheap" portfolio, community banks represent the largest component -- as has been the case with virtually every value screen that I've run over the past year. Small banks account for some 30% of the portfolio's current names. One larger bank -- Comerica (CMA) -- also makes the list.

Life-insurance companies serve as the portfolio's second-largest component. I'm comfortable with portfolio members Prudential (PRU), Northwestern Life (NWLI) and Unum (UNM), but have to let my qualitative side override my "inner quant" when it comes to component American Equity Life (AEL). AEL does a lot of indexed-annuity business and will be hurt by new U.S. fiduciary regulations that change the rules for retirement plan investing.

The "Double Cheap" portfolio currently has a 78.8% average price-to-tangible-book value, 3.74 average EV/EBIT ratio and a $1.4 billion average market cap. Dividend yields average about 1.56%, while the typical F Score is about 6.0 (meaning companies in the group are fundamentally solid).

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin was long NBN, NWLI, SVT and GWGWF, although positions may change at any time. Please note that due to factors including low market capitalization and/or insufficient public float, we consider some of the equities mentioned in this column to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

TAGS: U.S. Equity | Financial Services | Investing

More from Financial Services

Bearish Bets: 3 Stocks You Should Consider Shorting This Week

Bob Lang
Jun 4, 2023 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

For Stability and Quarterly Payments, You Gotta Have FAITH

Jim Collins
May 31, 2023 1:01 PM EDT

If we believe normalcy will return to the U.S. financial system, this investing plan could give outsized returns.

Here's When I'd Be a Buyer of Marsh & McLennan

Bruce Kamich
May 25, 2023 2:14 PM EDT

Let's review the charts and indicators.

There Are 2 Ways to Interpret Fair Isaac Stock

Bruce Kamich
May 22, 2023 2:20 PM EDT

Let's see what the charts look like.

Apollo Global Is Poised for a Rally

Bruce Kamich
May 19, 2023 9:12 AM EDT

Here's my first price target and where traders could risk to.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 01:51 PM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Adjusting Your Trading Approach to Shifting Market...
  • 06:54 PM EDT CHRIS VERSACE

    AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

    Listen in as the Action Alerts PLUS Podcast tackle...
  • 12:07 PM EDT STEPHEN GUILFOYLE

    Selling Some of This Surging AI-Related Stock

    This isn't the only name in the Stocks Under $10 p...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login