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Cheap stocks — measured by fundamentals — tend to outperform expensive ones.
Value investing has the longest academic pedigree of any investment factor. Benjamin Graham and David Dodd advocated buying cheap stocks as early as 1934. In 1992, Fama and French formally demonstrated that stocks with low price-to-book ratios earn significantly higher returns than expensive stocks — the "value premium."
The value premium exists because cheap stocks tend to be distressed, out-of-favor, or misunderstood. Investors demand higher returns for holding these riskier, less "glamorous" stocks. The behavioral explanation is simpler: investors overreact to bad news, pushing prices below fair value, creating buying opportunities for systematic investors.
Value experienced a prolonged drawdown from 2017 to 2020 as growth stocks dominated. However, since late 2020, value has staged a significant recovery, reinforcing its long-term efficacy despite periodic underperformance.
Our value score combines four enterprise-value-based yields, each percentile-ranked within sector peers:
• EBIT / TEV (35% weight) — Operating earnings yield relative to total enterprise value (market cap + debt - cash)
• EBITDA / TEV (25% weight) — Cash earnings yield, less affected by depreciation policies
• FCF / TEV (25% weight) — Free cash flow yield, the purest measure of cash generation relative to price
• Earnings Yield (15% weight) — Net Income / Market Cap, the inverse of P/E ratio
Using enterprise-value-based yields rather than simple price ratios (P/E, P/B) accounts for differences in capital structure. Higher yields (cheaper stocks) produce higher value scores. Value receives a 15% weight in our composite.
Fama, E. & French, K. (1992)
“The Cross-Section of Expected Stock Returns”
Journal of Finance
Asness, C., Moskowitz, T., & Pedersen, L. (2013)
“Value and Momentum Everywhere”
Journal of Finance
Graham, B. & Dodd, D. (1934)
“Security Analysis”
McGraw-Hill (Book)
The value factor systematically selects stocks that are cheap relative to their fundamental measures — earnings, book value, sales, and cash flow. Decades of academic research confirm that cheap stocks tend to outperform expensive ones over multi-year periods.
We combine four enterprise-value-based yield metrics — EBIT/TEV (35%), EBITDA/TEV (25%), FCF/TEV (25%), and Earnings Yield (15%). Using EV-based yields rather than simple P/E or P/B ratios accounts for differences in capital structure across companies.
No. Value experienced a prolonged drawdown from 2017-2020 but has recovered strongly since. Academic research spanning 100+ years confirms the value premium is persistent and robust. Periods of underperformance are normal for any factor.
A value trap is a stock that looks cheap by valuation metrics but is cheap for a reason — deteriorating fundamentals, shrinking market, or management problems. Our composite model mitigates this by also weighting quality and momentum, which help filter out deteriorating businesses.
While value has strong long-term evidence, it is more cyclical than quality and momentum, with longer periods of underperformance. The 15% weight reflects both the evidence for value and its higher variability compared to quality (30%) and momentum (25%).