Trailing twelve-month P/E ratios account for 91% of the variation in analysts’ price targets. We construct a new kind of asset-pricing model around this fact and show that it explains the market response to earnings surprises.
This paper provides new evidence on the efficacy of prioritizing transactions so as to focus portfolio turnover on the trades that offer the strongest signals and hence the highest potential performance impact.
The authors effectively argue the case for intrinsic value and DCF based approaches to building Value factor strategies. The traditional value measures, especially the book-to-market ratio, are described as ineffective in today's market environment.
While both the S&P 500 and the Nikkei indices have recently hit all-time highs, the valuation and balance sheet data we have reviewed indicate that the downside risks in Japanese stocks appear to be far less than the risks in U.S. stocks. Evidence such as this helps explain why legendary investor Warren Buffett has been buying Japanese stocks.
While analysts underwrite high growth for companies that have grown quickly and slow growth for companies that have grown slowly in the past, a large body of evidence demonstrates that reversion to the mean of both positive and negative abnormal earnings growth is the norm.
When a small subset of companies makes up a large portion of a portfolio, for better or worse their returns will have a greater impact on overall portfolio results.
Over the very long term, while value stocks have been less profitable and have had slower growth in earnings than growth stocks, they have provided higher returns.
There are various measures of value and quality, with one being Marx’s gross profits-to-assets.
Running regressions on past returns is a great tool for academic researchers who understand this approach's nuance, assumptions, pitfalls, and limitations. However, when factor regressions become part of a sales effort and/or are put in the hands of investors/advisors/DIYers, "the tool can quickly turn you into a fool."
Although the most efficient way to implement a value strategy may need to be clarified, it is clear that value has withstood the test of time and that some implementations are superior to others. The evidence suggests that P/B is not an efficient metric as a standalone criteria. Instead, value strategies that use P/B should include at least a measure of profitability while managing sector - and security-level diversification.
The article aims to explore the possibility that changes in fundamentals play a role in the attenuation of stock market anomalies, offering an alternative explanation to the prevailing arbitrage-based explanation
Summary: no difference in average returns between large-cap and small-cap portfolios. There you have it. The small-cap sacred cow has been slaughtered.
We recently hosted our 6th Annual Democratize Quant Conference. This post is a recap of what we heard and some resources we can make available to the public.
John Campbell, Stefano Giglio, and Christopher Polk, authors of the March 2023 study “What Drives Booms and Busts in Value?,” sought to determine which factors drive value’s booms and busts. They interpreted the returns to the standard value strategy through the lens of Robert Merton’s intertemporal CAPM (ICAPM).
Eric Balchunas, Cliff Asness, Kai Wu, Que Nguyen, Corey Hoffstein
Factor strategies need to be rebalanced in order to maintain their factor exposure. But different factors decay at different rates and this affects how they should be rebalanced. For example, momentum needs to be rebalanced more than value. This study digs into these questions.
On this week's episode, Isaiah is joined by expert Dr. Wesley Gray, CEO of Alpha Architects, to discuss the concepts of value 🌱 investing.
We believe owning deep-value stocks is potentially interesting at these valuation peaks. But as I said in the previous two times I wrote this, the spread can get more extreme. At some point, we'd like to stop talking about the valuation spread and its potential effect on forward expected returns...and see that spread COMPRESS!
Wide divergences between the valuations of cheap stocks relative to expensive stocks have preceded significant outperformance for value over the subsequent decade, as shown in this figure.
Given that valuations provide information on equity returns, it should not be surprising to learn that valuation spreads provide information on future factor premiums.
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