How can we find value companies?  

In the last article, What is Factor Investing? Examples in the European markets, we described how the value factor is useful for finding stocks considered undervalued based on fundamentals like low Price-to-Earnings or Price-to-Book ratios. The idea is that investing in undervalued stocks can give us an extra return in the long term because we are paying a low price for assets that have a higher value and should appreciate over time. 

Warren Buffett, one of the best investors of all time, has always advocated paying a “reasonable” price for the companies in his portfolio. This idea comes from his mentor, Benjamin Graham, who is considered by many to be the father of value investing as seen in his works, The Intelligent Investor and Security Analysis (co-authored with David L. Dodd). Other successful investors  like Seth Klarman, Joel Greenblatt or Howard Marks subscribe to this same investment strategy. 

Using the Interactive Brokers TWS, we can find undervalued companies by filtering using the advanced scanner and utilizing the Price-Earnings ratio [PE] and Price- Book ratio. The average of the historical PE ratio of the S&P500 has been close to a value of 19, but recently we now see that value is 28, while the Price- book ratio has been 2.8 and is now close to 4.7.  

As an example, we can set a range of between 8 – 14 P/E and 0.8 – 3 P/B to detect value stocks using our filters. We can also add filters by capital, volume, and price, to ensure that we will obtain companies of sufficient size and liquidity. We should consider that if we look for companies with very low valuation ratios, it is possible that the reason is that these companies are going through a difficult financial situation and the valuation is appropriate. It is important that we avoid these sorts of value traps.  

If we filter by the parameters mentioned above, we will get these results:  

Source: IBKR TWS.

We can also modify the filter and add other parameters if we want to be more specific. Usually, technology sector stocks trade at higher multiples. We could search only for companies in this sector and use higher limits as parameters; here are some additional results : 

Source: IBKR TWS.

From all of this, we can see the value in well-designed filtering tools utilized with whichever metrics one decides are best suited to their purpose. The added benefit of having these tools closely linked to an efficient order delivery mechanism can make the road to creating an income generating portfolio that much easier.