Corona crash portfolio started - Cheap quality companies

To help you profit from the Corona market we started a Corona Crash Portfolio

With the April 2020 issue of the Quant Value Newsletter we started a new Corona Crash portfolio.

For example, the first company we recommended is an extremely undervalued quality chemical company listed in Singapore with just about no debt and cash equal to 90% of its market value. The company is trading at a PE ratio of 3.5, Price to FCF of 3.7 and EV to EBIT of 0.2.


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Corona Crash Portfolio Rules

We want to help you make the best from the Corona market crash with a Corona Crash Portfolio.

In this portfolio we recommend the most undervalued quality companies with a strong balance sheet we can find.

You can read exactly how we find these companies in this article: How to find great investments when the market crashes scroll down to the part called How to find undervalued quality companies.


To find ideas we are going to use the following two valuation indicators:


Value Composite Two

Value Composite Two (VC2) is a combined valuation indicator that combines the following valuation ratios into a single valuation indicator:

  • Price to book value
  • Price to sales
  • Earnings before interest, taxes, depreciation and amortization (EBITDA) to Enterprise value (EV)
  • Price to cash flow
  • Price to earnings
  • Shareholder Yield

VC2 is a great valuation ratio to use as it lets you find undervalued companies from different valuation angles. For example book value, cash flow, net profit and operating profit.


Qi Value

Qi Value is also a ranking value that also uses a combination of the best valuation ratios we have tested.

It ranks the whole universe of companies in the screener using the following four valuation ratios:

  • EBITDA Yield
  • Earnings Yield
  • FCF Yield
  • Liquidity (Qi)

The main difference between Qi Value and VC2 is that VC2 included price to book and Qi Value includes the Liquidity Qi ratio.



How to find cheap companies that will survive

Using the above two ratios to find cheap companies is only half of what we are doing.

We also make sure that the companies we recommend have the financial strength to survive a possible slowdown after a market crash.

To do this we use the following ratios:

  • Piotroski F-Score - The Piotroski F-Score is a great indicator to find companies with positive financial momentum.
  • Gross Margin (Marx) - This is the best quality ratio we have tested by far.
  • Debt to Equity – To make sure the company does not have a lot of debt by using the Debt to Equity ratio
  • Debt to Free Cash Flow – We also want to make sure a company generates enough Free Cash Flow to be able to pay back its debt by using the Debt to Free Cash Flow ratio.
  • Net Debt to EBIT - Net Debt to EBIT is a conservative ratio (it uses EBIT not EBITDA) to make sure a company can pay back its debts through the profits the business makes.


Conservative position sizes

No one knows if these companies can go any lower and by how much.

That is why we recommend that you buy smaller positions – 1% of your total portfolio.

And if you want to be more careful buy your investment in small positions over time. For example 33% of the position now, 33% in a month and 33% in another month’s time.

No trailing stop loss

Also because of the high crisis volatility we are not going to follow a trailing stop loss on these companies.

One year holding period

We are simply planning on selling them after a year if they don’t fit the quality cheap strategy any more.


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