Global Market Valuations based on EBIT/TEV

Global Market Valuations based on EBIT/TEV

June 9, 2014 Value Investing Research
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(Last Updated On: March 15, 2015)

We ran some numbers on the large liquid universe of stocks (>2B USD) traded in EAFE countries. In total there are 1086 names in the universe.

We like to focus analysis on large and liquid securities because this eliminates potential outliers and prevents the results from being driven by micro-caps. Having spun the data so many times, it is remarkable that people believe ANY results that include small-cap securities. The data is poor, erratic, and allows the author of the study to manipulate the results behind the scenes. Yuck!

A quote from Eugene Fama on the subject:

Microcaps can be influential in EW hedge portfolio returns for two reasons. First, though microcaps are on average only about 3% of the market cap of the NYSE-Amex-NASDAQ universe, they account for about 60% of the total number of stocks. Second, the cross-section dispersion of anomaly variables is largest among microcaps, so they typically account for more than 60% of the stocks in extreme sort portfolios.

From a practical perspective, if the extreme returns associated with an anomaly variable are special to microcaps, they are probably not realizable because of the high costs of trading such stocks.

 

We have also chosen the EBIT/TEV measure as the valuation metric, because our own research supports the argument that it is most predictive for future stock returns.

 

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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Here we plot the median and mean EBIT/TEV (EBIT Yield) measure for each country and the number of stocks in each country (that are included in our large liquid universe).

image (3)
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Japan is relatively cheap within the universe. Norway and Italy are also cheap.


Note: This site provides NO information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.


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Please remember that past performance is not an indicator of future results. Please read our full disclosures. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.


Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.