Once returns in March are better adjusted for systematic risk factors, there were useful valuation signals to benefit from including revenue and free cash flow based valuation.

To read more about this see: http://quantchat.com/?p=482.

“Drivers for the year-to-date regional bank outperformance in our view includes: a) below tangible book valuations at the start of the year . . . b) relatively low valuations (mid-cap bank trading at 9x normalized EPS on Jan 1, though 14x currently) amid an improving economic backdrop (increased GDP growth, improved job creation)”

so how is that a “junk rally” and not a “cheap rally”. I suspect there is a similar character to the non-banks that outperformed during the quarter (low P/B, low P/Normalized EPS)

Sometimes people can be too clever.

P.S. It’d be interesting to catalog just who’s been predicting a ‘major correction’ — for six months already.

Many of these “low-quality” stocks ranked very poorly back in March and still do today on many fundamental factors. But the key drivers of valuation — ROIC and cash flow growth — bottomed at this time last year, and have been improving. MGM Mirage is a case in point: bit.ly/aZFVpE

What I think many of these quant models may have missed is that relative fundamental factors are irrelevant following a huge market correction. What simply matters is that there is some incremental improvement in ROIC and cash flow prospects, which can justify at least a partial return to some kind of long-term mean.

It’s hard for even industry experts to get behind a “low-quality” company at inflection points like last March, and I am not pretending I did so myself. But I think a delayed reaction to this is starting to happen now, and that we will see more of it — take a look at the recent upgrade of HOG for example.

In any case, I do agree that it’s more prudent to try to partially participate in a market rally by focusing on “higher-quality” stocks.

I just posted an article on such a strategy and some others, available here: bit.ly/cdT4hw

great quote