Value Composite #1 Screen

Value Composite #1 is a compilation of multiple value factors. Jim O’Shaughnessy, in his research, found that there was an “ongoing horse race” between which single factors performed the best.

While stocks with the lowest price-ratios always ended up as the best investment options, the best performing price-ratio continuously changed over various time periods.

This led O’Shaughnessy to build a “master value composite factor” which consistently outperforms any individual metric.

Source

Chapter 15 of the fourth edition of What Works on Wall Street is titled, “Combining Value Factors Into A Single Composite Factor.” In the chapter, author Jim O’Shaughnessy studies the performance of three different combined value factors.

Value Factor #1 is what he calls a “pure play” factor because it only accounts for balance sheet and cash flow metrics. The results show that this strategy performed an average annual compound return of 17.18% from 1963 to 2009.

Value Composite Results

Premium Membership: The 200 stocks with the lowest combined rank are displayed in spreadsheet format. Premium screens can be sorted by fundamentals.

Valuation Factors

• Rank Stocks by Price-to-Book from lowest to highest
• Rank Stocks by Price-to-Earnings from lowest to highest
• Rank Stocks by Price-to-Sales from lowest to highest
• Rank Stocks by Enterprise Value-to-EBITDA from lowest to highest
• Rank Stocks by Price-to-Free Cash Flow from lowest to highest
• Combine rankings for each factor and list in order of lowest to highest

*Enterprise Value = Market Cap + Total Debt + Minority Interest + Preferred Stock – Cash, Cash Equivalents, and Short-term Investments

*Earnings, Sales, EBITDA, and Free Cash Flow are based on trailing twelve month performance

*Book and Enterprise Value calculations are based on most recent quarter and latest closing price

Implementation

At the end of Chapter 15 in the fourth edition of What Works on Wall Street, O’Shaughnessy states, “Individuals might find buying the top 25 or 50 stocks an attractive way to put together a portfolio with excellent long-term returns, reasonable levels of risk, and outstanding base rates.”

Because the results between the 25-stock portfolio and 50-stock portfolio were nearly identical, investors would be wise to stick with a concentrated portfolio of 10 – 30 stocks.

This can be accomplished by regularly investing equal amounts in the qualifying stock with the lowest combined rank.

Follow along with our corresponding Shadow Stock Portfolio as it systematically invests based on the results of this stock screen.