It's a hard time to invest.
Markets are falling, start-up IPOs have fallen up to 90%, crypto investors have been wiped out, and profit warnings are popping up left and right.
You may also have the feeling that investing at the moment is like walking through a minefield. You never know if are buying something that falls 30 to 40% next week.
We are starting the Crash Portfolio
And in spite of this we are (very selectively) starting a Crash Portfolio with the August 2022 issue of the Quant Value Newsletter.
This is after the very successful Corona Crash portfolio we started in April 2020. The 26 companies we recommended had an average return of 56.4%.
Why start buying now?
Why start investing now you may be thinking. The main reason is cheap high-quality companies.
I admit that we haven't seen a complete selloff with markets falling 10% or more in a day but that doesn't mean that a lot of investors are not losing their nerves and selling stocks because they just want to get out.
This is especially true for small companies where there are not a lot of buyers lined up.
These companies can of course go down more. But if they are already down a lot and are already undervalued how much further can they fall?
No one knows and as you know no one rings the bell at the bottom of the market. So, at some point we have to have the courage to start buying.
Crash Portfolio Rules
In the Crash Portfolio we are recommending the most undervalued high-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 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 the Price to Book ratio. VC2 includes price to book and Qi Value includes the Liquidity Qi ratio.
Find cheap companies that will survive
Using the 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, about 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.
Strict trailing stop loss
Also, because we do not know how low markets can go are following a STRICT trailing stop loss of 20% on all companies.
One year holding period
All recommendations will be sold after a year if they don’t fit the quality cheap strategy any more.
Difference between the Crash portfolio and Quant Value investment ideas
In case you were wondering, the difference between the Crash portfolio and the normal Quant Value newsletter ideas is that the Crash Portfolio recommends ideas in spite of falling markets (being below their 200-day simple moving average).