Why quality and value can be a magic formula for bargain hunters

Joel Greenblatt, the prominent US fund manager, once wrote that “buying cheap stocks at bargain prices is the secret to making lots of money”. Part of the challenge however, as Greenblatt noted, is that value investing doesn’t work all the time. Indeed, over the past two years, some of the value strategies tracked by Stockopedia have had a rough ride. But we’ve seen some changes in that trend in 2016, with Greenblatt’s Magic Formula strategy putting in a strong performance in the UK, Europe and the US.

To understand this performance, it’s worth exploring some of the factors that drive value strategies - and why hardened value hunters are prepared to ride out periods of underperformance in the expectation of stellar returns.What really makes a value stock?Value strategies come in a variety flavours, but they all share a focus on stocks that are priced cheaply against either what they earn or what they own.Take for example, the classic value investing style of the late Ben Graham and modern day hedge fund guru, Seth Klarman. Their focus digs deep for stocks that trade at prices well below their intrinsic value. These are the companies hated most by...