If you're interested in using the Value Composite Two indicator developed by James O’Shaughnessy (in What works on Wall Street) without the price to book ratio, our updated Quant Value Composite in the Screener is your ideal solution.
Introducing the Quant Value Composite
The Quant Value Composite mirrors the Value Composite Two but omits the price to book ratio.
It is calculated by using the following five key valuation ratios:
- Price to Sales: The lower, the better,
- EBITDA Yield or EBITDA to EV: The higher, the better,
- FCF Yield (FCF to EV): The higher, the better,
- Price to Earnings (PE): The lower, the better,
- Shareholder Yield: The higher, the better
This revised composite indicator replaces the price to cash flow ratio with the more comprehensive free cash flow to enterprise value ratio, offering a refined approach as it incorporates Enterprise value instead of simply market value.
Value Composite Two calculation
As a reminder Value Composite Two is calculated using the following six ratios:
- Price to book value
- Price to sales
- Earnings before interest, taxes, depreciation and amortization (EBITDA) to Enterprise value (EV)
- Price to cash flow
- Price to earnings
- Shareholder Yield (Dividend yield + Percentage of Shares Repurchased)
Origin of the Idea
Our inspiration stems from O’Shaughnessy Asset Management's 2014 research on Canadian stocks, which highlighted a composite valuation ratio excluding the price to book ratio.
- Value & Momentum — Building a Unique Canadian Equity Portfolio
- Alpha Capture & Liquidity—A Look at the Canadian Market
Their findings showed better returns, as it effectively avoids value traps that appear inexpensive yet underperform.
Using the Quant Value Composite
The Quant Value Composite is user-friendly, designed for seamless integration into your screening process. It offers the flexibility of being a primary factor with adjustable sliders or an column in screener results for easy sorting. Plus, its availability in the historical screener makes it available for back-testing.
Selecting Top-Performing Quant Value Composite Companies
To find the best-ranked companies, adjust the slider to filter from 0% to 10%. This will give you the 10% top Quant Value Composite companies in the screener.
In summary, the Quant Value Composite effective lets you find Value Composite Two companies without using the price to book ratio.
It lets you find high-performing stocks, bypassing the limitations of the price to book ratio.