As with our other Strategy Blogs, once a month we will rank the JSE into 10 deciles based on Price/Book ratio and then publish the contents of the Decile-10 portfolio. This is the portfolio with the lowest 10% of Price/Book ratios on the JSE. As we have shown in our historical research, this portfolio repeatedly manages to significantly outperform the ALSI. This is similar to the "Dogs of the Dow" theory except that we are basing our measure of bargain on the Price/Book ratio as opposed to the Dividend Yield.

As with our research, we only focus on the JSE ORD shares (no warrants etc.) We then also exclude very illiquid micro-cap shares from the excersise only focusing on shares with market capitalisation above R50M.Finally we only look at issues that have traded more than 20 times in the last 2 months. This is what PowerStocks refers to as their "Tradeable Universe" which typically eliminates about 25% of the JSE.

Although there are  30 shares in a Price/Book Decile, our research has shown, from a regression analysis perspective, that you only need to pick the 8-10 shares with the lowest Price/Book ratios from Decile-10 to come within 90%-110% of the performance achieved by the entire Decile, which is great news.

Below is the first publication we make of the Price/Book Decile-10 of the "Tradeable Universe" as of 2 March 2009. Worldwide research, confirmed by us locally for the JSE, shows that you should do pretty nicely by creating such a portfolio and forgetting about it for 3-5 years, especially given the bargain basement prices that abound currently. Do not be surprised to see some obscure shares here - thats because the screen is designed to do exactly that! These are out of favour issues trading well below liquidation value and when the market turns, they will quickly revert back to fair value.



Note how the last share has a Price/Book of 0.34 (its trading at 34c on the Rand), identical to the average maximum value for the 4 sets of 5-year data we backtested for this strategy! The last column is the PowerStocks BUY Indicator (PBI), which is an indicator from 0-6 indicating price movement momentum based on various pricing action factors. Shares with PBI of 0-1 are on strong downward slides, shares with 2-3 PBI are buy signals and shares of 4 and above are on powerful upward moves.