Our Sprout Undervalued Stocks Index applies machine learning to analyze financial data of stocks to screen undervalued ones. Like you, we the developer of the index are also curious about the effectiveness of the system. So, we decided to test it with our own money. We are pleased to report that the index helped us identify a stock that beat the market by nearly 10% in only two weeks!
What We Did
Given that the Sprout Index is a screener for undervalued stocks, we used the index as the starting point for our research. Yes, we do our own research even though we are the ones who did the analysis. And you should too exercise your due diligence before investing your hard-earned money based on others’ analysis!
First, we needed to decide which sector to invest in. As people’s life start going back to normal, we believe that the US economy will soon enter the early stage of a new business cycle, during which consumer discretionary, real estate, and industrials sectors tend to see the strongest growth. As Peter Lynch said in his One Up on Wall Street, one should invest in the industry that he or she knows well. So, we checked our August 21 report on consumer discretionary sector because, as consumers ourselves, we are most familiar with this one among the three. Then, in the consumer discretionary sector, we were interested in the hotel and restaurant industry because we travel fairly often and are quite familiar with the businesses in this industry.
In the hotel and restaurant industry, the two most undervalued stocks are LVS (Las Vagas Sands Corp) and H (Hyatt Hotels Group). In our mind, we thought that, with the overwhelming unemployment, fewer people would have extra cash to gamble with in the near future and the increase in business travels would make Hyatt a better choice, not to mention that Hyatt’s reputable brand name would give it solid defense against competition. Then, we checked the sub-industry ranking, where casinos and hostels are ranked separately. The fact that Hyatt is ranked number 1 in hotel sub-industry and number 5 in the entire sector consolidated our confidence in it.
Besides ranking, we then dived deep into the financial statements to look for indicators for value. It should be noted that it is always important to look at financial statistics with your naked eyes. The reason is that statistical analysis such as machine learning is very sensitive to missing data. For example, if only one of hundreds of stocks misses a value for price, then either the stock can’t be included in the analysis or the price factor will not be used. And it is not uncommon for financial data providers to have missing values in their data bases. So, again, it is always important to actually look at the data you are interested in.
To make our point clear, below are some of the statistics that we looked at in comparison with the Hotels and Restaurant industry (our undervalued index compares stocks with other stocks though). As you can see, comparing to the industry, Hyatt makes more money per share and has had faster earnings growth, but its stock is sold at a much cheaper price than other stocks in the industry (21.77 vs 1089.75)!
|Statistics||Hyatt||Hotels & Restaurant Industry|
|Earnings per Share||2.68||2.08|
|Earnings Growth (5 yr)||26.45%||11.25%|
Approved by the undervalued stocks index, financial statistics, and our intuition and impression about the company and the economy, we decided to invest in Hyatt when the market opened on the next Monday (our undervalued stocks index is reported on Fridays to give investors time to research during the weekend).
What Happened Then
So far, the price movement has been positive comparing to the market. While the three major indexes have barely changed between August 24 and September 6，Hyatt has increased by about 10% and still going strong. What is more encouraging to us is that Hyatt remains to be the most undervalued stock in the hotel industry in our latest ranking on September 4. For this reason, we will increase our investment in it when the market opens after the Labor Day holiday
We are pleased that the Sprout Undervalued Index helped us quickly identify this investment opportunity. As we review other stocks in the lists, we acknowledge that Hyatt is not the best performing undervalued stock (check out PVH!), while some did perform worse. Nonetheless, the index effectively helped us narrow down our search and has its value in our investment decision making. Hope our work can add value to your portfolio too.