The Levermann strategy
11 years ago I was in a bookstore in Heidelberg and happened to come across Susan Levermann's book “The Relaxed Way to Wealth”. After more than 30 years of stock trading experience, I am still amazed by your investment strategy. I have to say that this book has changed the way I look at the stock market and stocks. I went from "gambler to considered value investor".
After many successes and failures with my stock transactions, I was inspired by the objective assessment of Ms. Levermann. Your method of valuing stocks was simple, understandable and comprehensible for me. Emotions are just ignored. Emotions are often the decisive criterion for investors when buying or selling.
The Levermann method works strictly according to facts and figures. I personally have had very good experiences with the method and became an absolute fan. Simply because I was able to achieve good returns.
I have been using the method for more than 11 years and have adapted and refined it a bit based on my experience. In this article I would like to go into the original method by Susan Levermann in order to create a basic understanding. In the article "11 years of experience with the Levermann strategy" I report about my personal experiences with the method.
The Levermann strategy simply explained on YouTube
We also explain the Levermann strategy in our YouTube video "The Levermann strategy simply explained“ in just 16 minutes. Alternatively, you can of course also read this article.
About Susan Levermann
Susan Levermann is a German economist, author and former fund manager. She managed 1.7 billion euros as a fund manager at Germany's largest fund company - DWS - and in 2008 was recognized as a fund manager for the best German equity fund over 1 and 3 years. It is noteworthy that she quit one day after receiving the award and initially taught mathematics as a substitute teacher at a comprehensive school in the eastern part of Berlin.
She is the author of the book "The relaxed way to wealth". In her book she describes her strategy in detail. In 2011 the book was awarded the German Finance Book Prize.
The Levermann strategy
The Levermann strategy is a value investment strategy and is based on 13 key figures. With her strategy, she tries to find undervalued stocks that have a high probability of doing well.
The valuation of a share is calculated from the sum of the 13 key figures. Each key figure can have the value +1, 0 or -1.
A share recommended for purchase must reach a total of at least 4 points (large companies with a market value of more than 5 billion) or 7 points (medium-sized and small companies).
A share is recommended for sale if the valuation of the share falls to 2 points (large companies) or 4 points (medium and small companies) or a lower value.
So it's very simple and understandable ... that's exactly what I was looking for. I wanted to better understand why a stock is a buy recommendation.
Objective evaluation with 13 key figures
Susan Levermann divides the 13 key figures into four groups.
Profitability and solidity
- Return on equity
- Equity ratio
- Profit margin
Cheap price
- Current price-earnings ratio (P / E)
- Average P / E over 5 years
Surprise effect
- Earnings revisions (change in earnings estimate)
- Analyst Opinions
- Reaction to quarterly figures
Trends and reversals
- Course today compared to course 6 months ago
- Rate today compared to rate 12 months ago
- Price momentum
- Three-month reverse
- Expected earnings growth
The key figures in detail
1) Return on Equity
Definition
Return on equity is the ratio of a company's profit to equity.
Significance for the evaluation
The higher the return on equity, the faster the company value increases. A high return on equity can be seen as protection against bad times.
Calculation
Return on equity in % = (net income / equity) * 100
Example MTU Aero Engines (September 6, 2019)
Return on Equity = (453.30M / 2,144.20M) * 100 = 21.14%
-> +1 point
Rating
+1 point: return on equity> 20%
0 points: return on equity between 10% and 20%
-1 point: return on equity <10%
2) Equity ratio
Definition
The equity ratio describes the share of equity in the total capital (equity + debt) of a company.
Significance for the evaluation
The equity ratio is an indicator of a company's creditworthiness. A high equity ratio reduces the risk of insolvency and, conversely, means lower debt.
Calculation
Equity ratio = (equity / total capital) * 100
Example MTU Aero Engines (September 6, 2019)
Equity ratio = (2,144.30 million / 6,850.48 million) * 100 = 31.30%
-> +1 point
Rating
+1 point: equity ratio> 25%
0 points: Equity ratio between 15% and 25%
-1 point: equity ratio <15%
3) Profit Margin
Definition
A company's earnings before interest and taxes (EBIT - Earnings Before Interests and Taxes) in relation to the company's sales.
Significance for the evaluation
The pre-tax profit margin expresses how profitable a company is. A high margin is a sign of high profitability. Note: This ratio does not apply to financial stocks.
Calculation
Pre-tax profit margin in % = (EBIT / sales) * 100
Example MTU Aero Engines (September 6, 2019)
Pre-tax profit margin = (608 million / 4,556 million) * 100 = 13.34 %
-> +1 point
Rating
+1 point: pre-tax profit margin> 12%
0 points: pre-tax profit margin between 6% and 12%
-1 point: pre-tax profit margin <6%
4) Current KGV
Definition
The price / earnings ratio describes the relationship between the current share price and the annual earnings per share. It describes how many years it takes for a company to generate the value of its shares as a profit.
Significance for the evaluation
The lower the P / E ratio of a share, the cheaper the share appears. Low P / E stocks have historically generated higher returns.
Calculation
Price / earnings ratio = share price / earnings per share
Example MTU Aero Engines (September 6, 2019)
Current PER = 23.65 -> -1 point
Rating
+1 point: current PER <12
0 points: current PER between 12 and 1
-1 point: current PER> 16 or <0
5) Average PER over 5 years
Definition
The average price-earnings ratio over 5 years expresses how the current price of the share and the average annual profit per share relate to one another over 5 years. The reported figures from the past 3 years as well as the expected figures for the current and the next year are used.
Significance for the evaluation
Using the 5-year average helps even out fluctuations. The lower the P / E ratio of a share, the cheaper the share appears. Low P / E stocks have historically generated higher returns.
Calculation
P / E ratio over 5 years = share price / ((profit 3 years ago + profit 2 years ago + profit 1 year ago + profit current year + expected profit next year) / 5))
Example MTU Aero Engines (September 6, 2019)
PER over 5 years = € 250 / ((€ 4.36 + € 5.83 + € 6.46 + € 8.10 + € 8.95) / 5) = 37.20
-> -1 point
Rating
+1 point: PER over 5 years <12
0 points: PER over 5 years between 12 and 16
-1 point: PER over 5 years> 16 or <0
6) Profit revision (change in profit estimate)
Definition
Change in profit estimate in the current year or next year compared to the value 4 weeks ago.
Significance for the evaluation
Profits are estimated by analysts. If the earnings estimate is changed for the current or next year, analysts expect positive or negative developments in the share.
Calculation
Change in profit estimate = (current profit estimate - profit estimate 4 weeks ago) / profit estimate 4 weeks ago (in %)
Example MTU Aero Engines (September 6, 2019)
Change in profit estimate = (€ 8.95 - € 8.95) / € 8.95 * 100 = 0%
-> 0 points
Rating
+1 point: change in profit estimate> 5%
0 points: Change in profit estimate between -5% and + 5%
-1 point: change in profit estimate -5%
7) Analyst Opinions
Definition
The analysts rank stocks on a 3-point scale: buy = 1, hold = 2, sell = 3. The average of all opinions is calculated.
Significance for the evaluation
Large companies: Analysts reflect a majority opinion that is no longer a surprise and therefore does not have any great price potential. Plus point when the majority of analysts say "sell", minus point when the majority of analysts say "buy".
For smaller companies with max. 5 analyzes, the analyst's opinion is classified as credible. Plus point if the majority of analysts say "Buy" and a minus point if the majority of analysts say "Sell".
Calculation
Analyst opinion = (Buy * 1 + Hold * 2 + Sell * 3) / Number of opinions
Example MTU Aero Engines (September 6, 2019)
Analyst Opinion = (6 * 1 [Buy] + 10 * 2 [Hold] + 5 * 3 [Sell]) / 17 = 1.95
-> 0 points
Rating
+1 point: Average analyst estimate> = 2.5 (small caps <= 1.5)
0 points: Average analyst estimate between 1.5 and 2.5
-1 point: Average analyst estimate <= 1.5 (small caps> = 2.5)
8) Reaction to quarterly figures
Definition
Public companies publish their quarterly report every quarter. On the day on which the numbers are announced, the percentage development of the share is compared with the development of the index.
Significance for the evaluation
If the share rises more than the index on the day the quarterly figures are announced, the figures are rated positively by the market. If the shares fall more than the index, the numbers are rated negatively.
Calculation
Reaction to quarterly figures = change in the stock on the day of publication - change in the index on the day of publication
Example MTU Aero Engines (September 6, 2019)
Response to quarterly figures on July 25, 2019 = (-1,33% - (-0,73%)) = -0,60%
-> 0 points
Rating
+1 point: reaction to quarterly figures compared to index> 1%
0 points: Reaction to quarterly figures in comparison to the index between -1 and + 1%
-1 point: Reaction to quarterly figures in comparison to the index <-1%
9) Course change in the last 6 months
Definition
The percentage by which the price of the shares has changed in the last 6 months.
Significance for the evaluation
The key figure shows an upward or downward trend in the shares in the last 6 months.
Calculation
Course change in the last 6 months = (current course - course 6 months ago) / course 6 months ago
Example MTU Aero Engines (September 6, 2019)
Exchange rate change in the last 6 months = (€ 250.00 - € 191.30) / € 191.30 = 30.68%
-> +1 point
Rating
+1 point: course change in the last 6 months> + 5%
0 points: Course change in the last 6 months between -5% and + 5%
-1 point: Price change in the last 6 months to the index <-5%
10) Course change in the last 12 months
Definition
The percentage by which the share price has changed in the last 12 months.
Significance for the evaluation
The key figure shows an upward or downward trend in stocks over the past 12 months.
Calculation
Course change in the last 12 months = (current course - course 12 months ago) / course 12 months ago
Example MTU Aero Engines (September 6, 2019)
Course change in the last 12 months
= (€ 250.00 - € 183.90) / € 183.90 = 35.94% -> +1 point
Rating
+1 point: course change in the last 12 months> 5%
0 points: Course change in the last 12 months between -5% and + 5%
-1 point: course change in the last 12 months <-5%
11) Price momentum
Definition
The price momentum shows whether a share changes from a falling or constant trend to an upward trend or from a rising or constant trend to a downward trend.
Significance for the evaluation
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 in the last 6 months than in the last 12 months.
Calculation
Score for course change in the last 6 months compared to the score for course change in the last 12 months
Example MTU Aero Engines (September 6, 2019)
Price momentum: Price change in the last 6 months = +1 and
Price change in the last 12 months = +1
-> 0 points
Rating
+1 point: course change in the last 6 months +1 and course change in the last 12 months 0 or -1
-1 point: course change in the last 6 months -1 and course change in the last 12 months 0 or 1
0 points: other cases
12) Three-month reversal
Definition
The key figure calculates how a share has developed in relation to the benchmark index for 3 months in a row. The key figure is only calculated for large caps (> 5 billion market value).
Significance for the evaluation
Many funds reject stocks that have had a bad performance in the last 3 months or buy stocks that have had a positive performance behind them. These purchases and sales initially affect the price and correct each other later.
Example MTU Aero Engines (September 6, 2019)
MTU has developed better than the MDAX every month -> -1 point
Rating
+1 point: performance of the share in each month <benchmark index
0 points: if the criteria for +1 and +1 are not met
-1 point: performance of the share in each month> benchmark index
13) Expected earnings growth
Definition
Compare the profit estimate for the next year with the profit estimate for the current year.
Significance for the evaluation
A higher profit estimate for the next year indicates a positive business development.
Calculation
Expected Earnings Growth = (Earnings Estimate Next Year - Earnings Current Year) / Earnings Current Year (in %)
Example MTU Aero Engines (September 6, 2019)
Expected earnings growth = (€ 8.95 - € 8.10) / € 8.10 * 100 = 10.49%
-> +1 point
Rating
+1 point: Expected earnings growth> 5%
0 points: Expected earnings growth between -5% and + 5%
-1 point: Expected earnings growth -5%
The Levermann method using MTU Aero Engines as an example (September 6, 2019)
When explaining each key figure, the company MTU Areo Engines was used as an example. The assessment was made on September 6, 2019. We now look at the sum of the key figures and then determine whether the stock is a buy recommendation or not.
A share recommended for purchase must have a total of at least 4 points (large companies) or 7 points (medium-sized and small companies).
With a Levermann score of +3 points, MTU shares are not a buy recommendation on September 6, 2019.
Does the method really work in reality?
From my personal experience I would clearly say “yes”. A much better proof, however, is the Wikifolio "Quality based on Susan Levermann". The Wikifolio was created in November 2012 and strictly follows the Levermann method. This Wikifolio has so far achieved a return of 279.3% (9/27/2019), a significantly higher return than the DAX.
However, it must be clearly stated that I am looking backwards in time. Whether the strategy will also work in the future is in the stars. Fortunately, nobody can yet predict how the stock market will develop. The future will bring many more surprises - positive and negative.
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Conclusion
The Levermann strategy offers a simple and understandable checklist for making an objective valuation of stocks. Ms. Levermann doesn't praise her method as the only true method either. She is of the opinion that the method can be adapted and expanded to include additional key figures. It is important to her that the rules and criteria are meaningful and that these must be adhered to in the long term.
I've been using the Levermann strategy myself for more than 11 years and have made a few changes to the metrics based on my experience. I go into more detail about the changes in the following article: 11 years of experience with the Levermann strategy
