It shouldn’t surprise you to know that retail investors, historically, are fed the short end of every stick out there. While the underlying reasons are complex and myriad, ultimately, it comes down to a lack of resources, experience, and wealth.
But no more. Q.ai is here to change the status quo by applying hedge fund investment kits on behalf of the little guy – you. Instead of putting your money into the pockets of costly financial advisors and subpar allocations, we’re here to knock down those pesky investing barriers with our multi-strategy investment kits.
Today, we’re going to take the next step by highlighting a few unconventional names from our best-performing flagship kit to date: the Value Vault.
What is the Value Vault?
The Value Vault from Q.ai is one of four flagship kits that turns traditional strategies on their heads – in this case, value investing. This kit carries a moderate risk level overall and focuses on low volatility, value underperformance, and kit concentration to nab the best names in the game.
To do so, our AI uses alternative metrics to guide the Value Vault’s security selection process. Instead of just relying on timeworn fundamentals such as dividend yields and P/E ratios, our advanced deep-learning algorithms also consider economic value and EBIT/EV yields, among other calculations.
So, what does this mean for you?
As you can see from the chart above, Q.ai’s Value Vault returned 35.4% in 2020. Moreover, it outperformed every benchmark year-to-date in 2021, including the tech-heavy Nasdaq, as well as our own Emerging Tech kit.
While 2020 was a year of technological innovation, the focus going forward will be on a return to business as usual while battling rising inflation and interest rates. As such, value investments are going to be more important than ever.
Q.ai’s artificial intelligence algorithms are primely tuned to pluck these names from the mix…even if these companies may not crop up on any other value lists. And it’s these unusual names that we’re going to explore today.
Value Vault Comparison Metrics
For today’s value picks, we’ve selected some of the biggest names from our Value Vault and dug out their dividend yields and trailing twelve-month (TTM) P/E ratios to highlight the “traditional” value investing fundamentals. Next, we threw in a new-school twist: the EV/EBIT ratio.
Simply put, the EV/EBIT ratio divides a company’s enterprise value (EV) by its earnings before interest and taxes (EBIT) to measure the total relative value of a business. This metric, as well as the reverse EBIT/EV multiple, is used to sniff out value underperformers for acquisition purposes – but here at Q.ai, we’ve adapted them to guide our kit strategy, too. (Though for today’s article, we’re sticking with the TTM EV/EBIT ratio for simplicity.)
When looking at an EV/EBIT ratio, the most important thing to note is that the higher the ratio, the more overvalued the company. (Even though higher values are typically used to indicate better profit-taking for investors.) That’s because lower values are indicative of a company that’s less profitable when it comes to dividends but are more financially stable in the long run.
Unconventional Names in the Value Vault
Most of the names in Q.ai’s Value Vault are unconventional to one degree or another – in fact, our Value Vault is over 90% different from any other value-based kit on the market. But thanks to our unusual stock selection system, many of these stocks appear fairly-to-overvalued at first glance…at least, until you dig into the fundamentals.
So why are they in our Vault? (And more importantly, why is our Vault performing so well?)
At the end of the day, it comes down to one simple truth: because our AI said so.
After all, that’s the purpose of using AI to sniff out stocks for Q.ai’s allocation strategies. With the superior number-crunching, pattern-picking powers at play in our artificial intelligence algorithms, sometimes, it’s difficult to understand why a particular stock fits into one kit over another.
But that doesn’t mean that it doesn’t belong there.
And that’s the purpose of today’s list: to highlight stocks that seem too big or overvalued to be a value pick – but are right at home in our Vault.
Akamai Technologies (AKAM)
- Dividend yield: N/A
- TTM P/E ratio: 32.58
- TTM EV/EBIT ratio: 26.95
Akamai Technologies provides cloud services to help deliver, optimize, and secure content over the internet. And as a value investment, Akamai doesn’t tick most of the boxes upfront. Though it has no dividend yield to speak of, a TTM P/E of 32.6 and an EV/EBIT of almost 27 appears to knock it out of the running.
But when you compare these numbers against the 2020 Internet Software sector’s P/E of 67.9, not to mention the sector’s 95.4 EV/EBIT ratio, Akamai starts looking more like the undervalued overachiever that it is.
Lumentum Holdings, Inc (LITE)
- Dividend yield: N/A
- TTM P/E ratio: 17.05
- TTM EV/EBIT ratio: 15.85
Lumentum Holdings is a manufacturer of optical and photonic products that supplies commercial optical networking and laser customers worldwide. In simpler terms, it’s a telecommunications company that builds essential components for other telecom companies.
Lumentum, to a first approximation, looks far more like a value company than Akamai, with a trailing P/E ratio of 17, a trailing EV/EBIT of 15.9, and no dividend yield to speak of. A quick look at the telecom equipment sector’s 18.5 EV/EBIT might dispel that notion– if it weren’t for the sector’s 2020 50.7 P/E that makes Lumentum’s current earnings ratio of 17 look criminally cheap by comparison.
Moody’s Corporation (MCO)
- Dividend yield: 0.69%
- TTM P/E ratio: 33.76
- TTM EV/EBIT ratio: 26.01
Moody’s Corporation provides credit ratings, research, tools, and analysis to the global capital markets via its credit rating agency and analytics firm. A quick look at its low dividend yield of 0.69% would suggest the company is in undervaluation territory – but its TTM P/E ratio of EV/EBITs of 33.8 and 26, respectively, do not.
But again, it’s important to take these numbers into context. For instance, the TTM P/E ratio as of January 2021 sat high at 44.2, whereas the TTM EV/EBIT rested at 31.2. With both of these numbers resting well below 2020’s sector averages, Moody’s is well-positioned as a value investment in our vault.
Microsoft Corporation (MSFT)
- Dividend yield: 0.84%
- TTM P/E ratio: 36.15
- TTM EV/EBIT ratio: 30.43
When you think of value stocks, Microsoft’s $265 share price and enormous revenues probably mean this stock doesn’t come first on our list. (In fairness, it’s not first on ours either.) But let’s look at the tech giant’s numbers: a dividend yield of less than 0.85%, a TTM P/E ratio around 36, and a TTM EV/EBIT of 30.4.
Those might seem high in a vacuum, especially considering the company’s ever-ballooning profits. But when you take into account the IT System and Application Sector’s TTM P/E of 149 for the 2020 year, as well as the sector’s EV/EBIT of 44, Microsoft starts looking downright cheap in comparison.
Motorola Solutions, Inc (MSI)
- Dividend yield: 1.33%
- TTM P/E ratio: 37.14
- TTM EV/EBIT ratio: 24.91
Motorola Solutions is one of many big-name telecom companies that provides communication infrastructure, devices, software, and related services in the modern age. And with a dividend yield of 1.3%, high TTM P/E ratio of 37.1, and an EV/EBIT of 24.9, it looks like the company is better positioned as an income stock rather than a Value Vault pick.
But take a peek at the telecom equipment sector’s 2020 numbers: an EV/EBIT of 18.5, with a TTM P/E of 50.7 as of January 2020. While the company’s EV/EBIT may come in a bit high for a value stock, it’s P/E ratio places it squarely in undervaluation territory – making Motorola the perfect unconventional value stock.
Viavi Solutions, Inc (VIAV)
- Dividend yield: N/A
- TTM P/E ratio: 53.88
- TTM EV/EBIT ratio: 31.27
Viavi Solutions, Inc. is perhaps the most unconventional stock in our Value Vault. Though it has no dividend yield to speak of, its TTM P/E ratio of 53.9 and EV/EBIT of 31.3 put it well abovethe industry’s TTM averages of 50.7 and 18.5, respectively. So why is it a member of the Value Vault?
Well, a variety of reasons come into play here. For one, the company’s forward-facing P/E is much lower at 21.2, which puts Viavi well within undervaluation territory on its own. The next is Viavi’s stock price, which stands well above its IPO price in 2015 – but compared to the rest of the communication sector, a $17 stock price is nothing.
And last, but certainly not least: because our AI said so.
Dividend yield, P/E ratios, and EV/EBIT ratios provided by Forbes AI Investor
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