Alpha Pro Tech Ltd. (NYSE: APT) is the textbook definition of a great value investment.
The company produces a wide range of protective gear, face masks and even building supply products. Business isn’t exactly booming, but it’s humming along.
The company’s financials are outstanding as well. No debt on the books. Plenty of cash and inventory. And best of all, it’s got $5 per share in book value — even though shares are just $4.
That means investors are getting about $1 in assets for every $0.80 they invest.
But if APT is such a great stock, then why aren’t its investors making any money?
Back when my colleague Mike Carr first wrote about APT in April of this year, shares were still just $4. And a year before that, they were still $4. Even if you look all the way back to April of 2000, you’ll find shares have only gained about $1. Roughly 1% per year.
Compare that to a stock like NVIDIA (Nasdaq: NVDA), which offers nowhere near the value. Nevertheless, NVIDIA’s shares have more than tripled so far in 2023 — while APT went nowhere.
So what’s the explanation? Is value investing dead? Or have all these investors just gone crazy?
Putting Value in Perspective
Value investing appeals to investors because it helps us make sense out of complicated markets.
We like to think that if you buy a piece of a company for less than it’s actually worth, then you’ll come out ahead in the long term.
Besides, we love an underdog story just as much as we love The Tortoise and the Hare.
But value doesn’t exist in a vacuum.
There are several other key factors that determine whether a company’s shares are likely to rise or fall. And if you don’t account for them, you’re not getting the full picture.
Sometimes there’s a good reason a stock is cheap. They can be too risky, too volatile or even just poor-quality investments.
For example, APT is an outstanding stock by value metrics … but the momentum just isn’t there.
Having value without momentum means that shares could potentially sit at $4 per share for another year or two (or five) while investors wait for the market to recognize the value. In the meantime, their investment is essentially dead money.
Value is still an important factor to consider when investing. But it’s not the only factor. So if you build your investing strategy around the concept of value alone, it’s a bit like building a one-legged stool. Not great for balance!
That’s why I recommend taking a more holistic, more systematic approach to investing. And it’s why I created my Green Zone Power Ratings system…
Maximize Returns with Green Zone Power Ratings
Ratings systems vary in functionality.
But they’re all meant to help you do one thing: buy good assets and avoid bad ones.
Based on decades of back testing and research, we developed our Green Zone Power Ratings system to run on six key factors.
Three are technical (aka they are related to a stock’s current price and trading activity):
- Momentum — Strongly uptrending stocks earn higher momentum ratings. We prefer to buy stocks that are already trending higher and at a faster rate than the overall market. This approach can increase our odds of success and decrease risk.
- Size — Smaller companies earn higher size ratings. We prefer to buy smaller companies for the extra “juice” that typically comes with them.
- Volatility — Less volatile stocks earn higher volatility ratings. We prefer low-volatility stocks because they’re proven to generate superior risk-adjusted returns over the long run — with less heartburn.
The other three factors are fundamental. These analyze the strength of the underlying company, including its balance sheet, profit margins and cash flows, as well as its growth trajectory:
- Value — Less expensive (aka “cheap”) stocks earn higher value ratings. We prefer to buy great companies at good prices because the price we pay changes how much we get from future returns. Overpaying for a stock is a costly mistake.
- Quality — High-quality companies earn higher quality ratings. We prefer to buy high-quality companies, of course! To determine quality, the model considers a company’s returns, profit margins, cash flows, debt ratios and operational efficiency, among other things.
- Growth — High-growth companies earn higher growth ratings. All things equal, we prefer to buy companies that are growing both revenues and earnings at faster rates than the market and economy.
We then combine our findings from both technical and fundamental analysis to provide an overall rating from 0 to 100. This score gives us a remarkably balanced view on the strength of the company, the behavior of its stock and, thus, the likely returns ahead for investors.
For example, here’s what Celsius’ rating looked like when I wrote about it in 2020, before soaring for 650% gains:
As you can see, its fundamentals weren’t exactly the best (with a Value rating of just 4 out of 100 … it was “expensive”).
But with a Momentum rating of 99 and Growth at 100, we were still “Strong Bullish” on the stock, expecting it the crush the market by 3X from there. It’s safe to say CELH did just that!
A Systematic Advantage That Delivers Serious Results
By incorporating factors like Momentum, the Green Zone Power Ratings system helps to filter out the kinds of “behavioral aspects” that consistently cost investors a fortune.
These behaviors include Anchoring, Herding and Loss Aversion (see the graphic below for the full list) and they’re hardwired into the human psyche. They’re fundamental to the way we see the world and make decisions. We’re all guilty of falling into these traps from time to time.
These same behaviors can ultimately lead to the mispricing of stocks across the market.
Individual stocks can become dramatically underpriced or overpriced for extended periods of time, before snapping back to reality.
But when we put our biases aside, and look at the market through a holistic, data-driven system like Green Zone Power Ratings, the opportunities become obvious.
You can access and review Green Zone Power Ratings for all the market’s top stocks by going here and typing a company name or ticker symbol into the search bar (top right of the page).
My colleague and Chief Market Technician Mike Carr has also unlocked a new way to use my system. That’s why I wanted to get back to basics today…
By understanding how each piece of this simple system works, you’re going to have a leg up when he shows you all the details of his brand-new Apex Profit Calendar on Tuesday, October 24 at 1 p.m. Eastern time.
I knew adding Mike to the team was a strong move, and I can’t wait for you to learn why next Tuesday. Click here to assure you don’t miss what he has to say.
To good profits,
Chief Investment Strategist, Money & Markets