Why Forced Selling Can Impact Your Value Portfolio

Traditionally speaking, one of the bigger challenges of value investing is determining whether a company is actually facing a real secular decline or whether a true value opportunity is present. Does this particular stock actually deserve its low price, or is it simply facing temporary conditions that are forcing it to be undervalued for now?Key Takeaways: When selecting stocks for a portfolio, value investors often need to discern whether a company is truly undervalued or directly facing secular decline. The Tweedy, Browne team keeps an eye on when a stock’s price declines due to forced selling. Forced selling is when investors sell a company’s stock due to technical reasons outside of company fundamentals. Active value ETFs like the Tweedy Browne Insider + Value ETF (COPY ) can deftly navigate the market and can capitalize on moments when companies are experiencing forced selling. Naturally, there are plenty of factors that can drive a stock to temporarily have a lower price than it potentially deserves. One factor that the team at Tweedy, Browne keeps an eye out for in particular is a trend they refer to as “forced selling.” For Tweedy, Browne, forced selling occurs when some shareholders sell their stock exposure due to technical factors that are unrelated to the business’s fundamentals. “It creates a great place to look for bargains, because this selling is mechanical – again, unrelated to the fundamentals of the business,” said Jay Hill, CFA, managing director at Tweedy, Browne. See More: Avoid the International Value Trap With ICPY’s Insider FocusThe Different Cases for Forced SellingIn particular, Hill highlighted three different examples why shareholders might engage in forced selling. To start, a company could engage in a spin-off that then does not fit an existing portfolio’s investment philosophy. As a second factor, Hill explained that redemptions, especially among mutual funds, could create demand for liquidity and a need to sell stocks. Lastly, if a company moves out of an index or changes its listing, that could force passive indexing funds to sell the stock regardless of the fundamentals. These three reasons may be vastly different in context, but they all lead to the same outcome: investors selling out of a company’s stock for factors outside of fundamentals. This is why disciplined value investing is paramount, especially when done through experienced active management. See More: COPY ETF Passes $400M AUM as Value Strategies SurgeCOPY's Take on Value InvestingAdvisors and investors can access Tweedy, Browne’s actively managed value approach through the Tweedy Browne Insider + Value ETF (COPY ). This fund uses Tweedy, Browne’s multifactor value model, while also screening eligible companies for insider momentum. For Tweedy, Browne, insider momentum can come through a few different means. Corporate insiders could be buying up their own business’s stock, or the company itself may be conducting share buybacks. COPY’s unique approach to value investing, combined with the flexibility of active management, can help it navigate the market and figure out which discounted stocks provide the best long-term opportunities. For those looking for a strategy adept at figuring out which companies are seeing forced selling and which are simply in a secular decline, this fund may offer a strong use case. For more news, information, and analysis, visit our Portfolio Strategies Content Hub. Tweedy, Browne Company LLC (“Tweedy, Browne”) is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not create, and should not be construed as creating, any legal partnership, agency relationship, affiliation, or similar relationship between VettaFi and Tweedy, Browne. VettaFi LLC is the author and owner of these articles.