Which Value Investing Metrics Should You Trust?
What is the best valuation metric to assess if a stock is cheap or expensive?
Jack and I were honored to see that Barry highlighted our 2013 Journal of Portfolio Management paper:
The chart below presents the key table from our paper:
Barry’s comment on our paper:
Perhaps the most readable of these is from Wesley Gray and Jack Vogel: “Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years” (Drexel University, January 2012).
These papers (and others) have identified a ratio that has been described as the single most successful measure of valuation in terms of historical track record: EV/EBITDA.
A close second is Tim Loughran and Jay W. Wellman’s “New Evidence on the Relation Between the Enterprise Multiple and Average Stock Returns.”
We did a deeper dive on this paper in the following blog post.
Here is my favorite chart from the paper:
Buying cheap stocks has been a good strategy–at least historically. And it certainly seems that enterprise multiples are more effective, on average, than measures that are more commonly used (e.g., book-to-market, or price-to-earnings).
Who knows which metric will be the best in the future, but one lesson is clear: buy cheap stocks. And if you don’t have the stomach of patience do buy individual stocks, identify value investing funds, value investing etfs, or value-focused stock-pickers searching in the bargain bin of the marketplace.
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