Investors have a powerful new tool at their disposal at Quant Investing, the popular stock screener platform, announces the addition of the Quant Value Composite ratio.
This composite indicator was developed to give personal investors a more comprehensive way to view of a company's valuation that excludes the Price to Book ratio.
We got the idea from James O’Shaughnessy who mentioned a composite valuation ratio excluding the price to book ratio in a research paper on Canadian stocks.
In the paper he mentioned that the composite indicator outperformed price to book because it was able to better separate winners from losers. It was also a way to avoid value traps that may look inexpensive but tend to underperform (the cheapest price to book companies).
Why use a composite factor?
As industry sectors go in and out of favour, so do stocks ranked by individual value ratios. This means that a single valuation ratio can underperform for extended periods of time and research has not found a way time these cycles.
Back testing by O’Shaughnessy Asset Management found a composite valuation ratio like Quant Value Composite never dropped below the top three single valuation ratio in any five-year period over the 26-year period from 1987 to 2013.
Not only that it was also one of only two valuation ratios that outperformed the market in every period. All other single valuation ratio at some point dropped to the bottom three. A composite valuation ratio outperformed the individual ratios in 87% of all rolling five-year periods.
This shows that when it comes to composite valuation ratios combining valuation rations outperforms the sum of its parts.
The Quant Value Composite Formula
The Quant Value Composite is a composite indicator that takes the entire screener universe and ranks it from best to worst based on five key ratios.
These ratios are:
- Price to Sales: The lower, the better,
- Price to Earnings (PE): The lower, the better,
- EBITDA Yield or EBITDA to EV: The higher, the better,
- FCF Yield (FCF to EV): The higher, the better,
- Shareholder Yield: The higher, the better.
Each company's ranking on these five ratios is added together to create a single composite value.
This composite value is then recalibrated on a scale from 1 to 100, with 1 representing the top 1% of the best-ranked companies in the universe and 100 representing the bottom 1% of the worst-ranked companies.
In essence, it condenses multiple valuation factors into a single, easy-to-understand score.
Ease of Use
The Quant Value Composite is designed for user-friendliness.
It is available as both a primary factor, accessible via a sliders, and as a column that can be added to the screener's output. Investors can easily fine-tune their screening criteria by adjusting the slider, allowing them to find companies that best fit their investment strategies.
Historical Data is Available
The Quant Value Composite is available in both the current and Historical screener, this allows investors to use it in back tests.
A Game Changer in Valuation
The introduction of the Quant Value Composite is a further step forward in the world of stock valuation.
By combining key valuation ratios while excluding Price to Book, Quant Investing has created a valuable tool for investors seeking a holistic view of a company's valuation.
Whether you're a seasoned investor or just starting your journey, the Quant Value Composite can help you make more informed decisions in today's dynamic market.
Discover the power of the Quant Value Composite and enhance your investment strategy on Quant Investing today.