The Levermann strategy optimized
I have been using the Levermann strategy to value stocks for more than 11 years. The original Levermann strategy uses 13 key figures. All 13 metrics are in the article The Levermann strategy simply explained precisely described. Based on my personal experiences, I made some adjustments and tweaks to the strategy.
I also explain the optimizations in our YouTube video 11 years of experience with the Levermann strategy. Alternatively, you can of course also read this article.
My experiences with the Levermann strategy and the resulting changes:
1. Optimization of the key figures.
2. Optimization of the conditions for buy and sell recommendations.
3. Don't buy at the annual high.
1. Optimization of the key figures
Let's start with the key figures. I have adjusted and expanded some key figures. Ms. Levermann is also of the opinion that the strategy can be adapted and expanded to include additional key figures.
Return on equity
The original Levermann strategy evaluates a return on equity above 20% as positive. I award a plus point from a value of 15%.
Reason: Warren Buffett, William O'Neil, Max Otte see a value between 10 and 20% as positive.
Analyst Opinions
I do not use the key figure analyst opinions for my evaluation.
Reason: From my point of view, it is not clear what factors were used to form the opinions on the key figure. I myself am always skeptical when a share is recommended to me for buying and I don't understand what the reasons are for the recommendation.
Course change in the last 6 months
The original Levermann strategy only looks at how the share price has developed over the past 6 months. If the share price has risen more than 5% there is a plus point. But what if the index - i.e. the average of the stocks - has risen during this time, e.g. 10%? Then the share underperformed. I always compare the development of the share with the development of the index and only assign a plus point if the share has risen more than 5% compared to the index.
Reason: The Levermann strategy does not take the development of the index into account.
Course change in the last 12 months
Just as with the key figure 'Price change in the last 6 months', I look at the development of the share price in the last 12 months in comparison to the index. Only if the share has risen more than 5% in comparison to the index do I award a plus point.
Reason: The Levermann strategy does not take the development of the index into account.
Price momentum
The price momentum shows whether a stock is changing from a falling or constant trend to an uptrend or from a rising or constant trend to a downward trend.
The price change of the last 6 months is compared with the price change of the last 12 months in order to determine an upward or downward trend. In the case of an upward trend, the share rises faster than the index in the last 6 months and significantly more than the price change over the last 12 months.
I use the same values as the original Levermann strategy, but the values are based on the comparison to the index.
Reason: The Levermann strategy does not take the development of the index into account.
Three-month reverse
The three-month reversal evaluates whether a share has developed above or below average for 3 months in a row compared to the index.
I don't use this metric for my rating.
Reason: Most of the time the score of this key figure was 0. Since I compare the development of the share price with the development of the index in the key figures, price change over the last 6 and 12 months, as well as in the key figure momentum, I don't see any added value in this figure. Furthermore, the three-month reversal is only used for large companies anyway.
Additional metric: price to book ratio (P/B)
I've added another important metric to my valuation, the price-to-book ratio.
Reason: Many stock market gurus such as Benjamin Graham, Warren Buffett and Joel Greenblatt use the KBV for their assessment.
Definition:
The P / B is calculated by dividing the current share price by the book value per share. The book value is obtained by adding up all of the company's assets (machines, buildings, computers) and subtracting the debts. The book value corresponds to the actual value of the company.
Significance for the evaluation:
The P / B indicates whether the stock exchange price is higher or lower than the actual value per share. With a P / B below 1, one could theoretically buy the company for less money than it is worth according to the balance sheet.
Calculation:
Price to book ratio = price of the share / equity per share
Example MTU Aero Engines (September 6, 2019):
KBV = 250.00 euros / (2,144 million / 52 million) = 6.1
-> -1 point
Rating:
0 points: course-to-book ratio between 1.5 and 2.5
-1 point: course-to-book ratio> 2.5
The optimization of the key figures summarized
2. Optimization of the conditions for buy and sell recommendations.
In order to decide whether a share is a buy recommendation or not, the sum of all key figures is formed in the Levermann strategy.
The original Levermann strategy recommends buying shares from 4 points for large companies (large caps), and from 7 points for smaller companies. Shares are recommended for sale when the score drops to 2 or less for large companies and 4 or less for smaller companies.
We have decided to adjust the scores for buying and selling and recommend buying for large companies from 4 points. For smaller companies, however, we give a recommendation from 6 points. We recommend selling stocks of both large and small companies when the score falls below 0 points. In this article you will learn more about the reasons for the adjustments: Better returns by optimizing the valuation method.
Reason: We have analyzed all buy and sell recommendations since January 2019 and came to the conclusion that we would have generated a +5.8% higher return with all recommendations if the stocks were only rated from a rating below 0 points, i.e. from a rating of -1 would have been recommended for sale..
3. Don't buy at the annual high.
In addition to the total number of points in the key figures, the difference to the annual high is decisive for whether a share is recommended for purchase. To protect against buying a stock overpriced, I introduced a distance rule of 10%. I only buy stocks if they are 10% below the high for the year.
Reason: A distance regulation of 10% is supposed to protect against buying stocks overpriced.
Annotation: Every TransparentShare user can decide for themselves whether they want to use the distance criterion for purchase recommendations or not. This indicator can be switched on or off in the profile. You can find more about this functionality in this article: Configure recommendation criteria.
TransparentShare under the microscope of Levermann expert Petra Wolff
All the described extensions to the Levermann strategy are implemented in the “TransparentShare” application.
Petra Wolff is Levermann expert and author of the book “The practical book on Levermann strategy: Stock selection according to the point system”.
Ms. Wolff tested TransparentShare intensively and published her analysis in an article. Among other things, she described in great detail what changes we made compared to the original Levermann strategy and also commented on them. Thank you very much to Petra for the good and detailed article.
Link to the blog: TransparentShare is a Levermann strategy with adjustments
Try TransparentShare for free
TransparentShare automatically evaluates German, American and European stocks on a daily basis based on the Levermann strategy. Simply test TransparentShare free of charge and without obligation. Without specifying a credit card.
Conclusion:
The original Levermann strategy uses 13 ratios to evaluate stocks. TransparentShare has adjusted four key figures, two key figures have been omitted and one new key figure has also been included. In total, TransparentShare uses 12 key figures for the evaluation.
Another optimization was made to the conditions for buy and sell recommendations. TransparentShare recommends large companies with a rating of +4 points and small companies with a rating of +6 points to buy. Stocks are recommended for sale if the rating falls below 0 points. With this adjustment, a better return could demonstrably be achieved in the past.
In addition, a TransparentShare user can decide whether he only wants to receive buy recommendations if the share price is at least 10% below the annual high. This prevents overpriced shares from being bought.
In the future, we will continue to analyze the strategy and, if necessary, make expansions if we can thereby achieve a higher probability of an improved return for investors.
You can find out more about the concept of TransparentShare here.
Have fun trading stocks!
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