Covestor

The Laureola Dividend Stocks strategy seeks to overcome the challenges of overvaluation by not only putting together a portfolio of companies with strong credit quality, but more importantly investing in a collection of businesses that rank high on the above valuation measures.

Specifically, the strategy’s forward P/E ratio stands at 11 and the price-to-book ratio stands at 1.3 – both low relative to the market and low relative to the market’s history. Further, we seek to understand a company’s normalized profit margin by looking at a variety of historical and industry measures. This normalization process is similar in spirit to Shiller’s effort to normalize market earnings. We ultimately derive a normalized P/E ratio for our portfolio companies, which on average stand at 12 for the overall portfolio. This  compares to our normalized P/E calculation for the overall market (using the same margin normalization approach) of 21, which is
coincidently the same as the Shiller P/E calculation for the market today.

Consequently, our strategy seeks to outperform the market over longer periods of time by employing similar valuation methods to identify bargains. In typical periods of market volatility, most stocks seem to move together (i.e. market breadth). However, over longer periods of time, markets aren’t nearly as uniform.

Market declines of late 2008, for example, were part of a wider systemic problem in the economy, and as a result, virtually all assets (ex-precious metals, ex-US Treasury Bonds) collapsed. However, compare this to the 2000-2002 market pullback, however, and a different story is told. While the S&P 500 Index lost -38% over the 2000-2002 period, small-cap-value (Russell 2000 Value Index) and mid-cap-value (Russell Mid-Cap Value Index) stocks generated considerable returns of +24% and +10%, respectively.

Consequently, we expect market volatility to work its way into our portfolio performance. However over longer periods of time, our strategy is positioned to benefit from our conservative valuation approach and the high credit quality nature of our businesses. Finally, our strategy focuses on dividend paying companies that in aggregate are yielding significantly more than the general market.