XC smallcase Portfolio: Value Alpha

This smallcase brings about a much-needed update to traditional value investing. In normal value investing, people typically buy low PE, cheap stocks which have dismal outlooks in the hope there is a hiccup in their fortune that will allow them to unload at a favourable price.

But, this is not a sustainable strategy. Instead, what we have done is twist the process from bottom up. We first look at companies that can consistently generate strong operating cash flows. We then run our accounting analytics to remove any fraudulent or fishy accounting, such as fudged sales, high receivables, and liquidity crunches. Out of these, we pick the names earning high returns on equity. Out of these, we buy the names with the lowest price to book value. That leaves us with a well-diversified basket of stocks that we buy and hold for a year and rebalance quarterly.

Applying our filters of quality first and then among those quality names we buy the relatively lower priced ones. This strategy has been tested to give phenomenal returns upwards of 35% CAGR over 20 years.

Written by Yash Sarda (yashsarda31@gmail.com)