The Price

Bargain prices of value stocks add great odds to outperforming overall market.

How do we know if we have a good price for a good company?

The answer lies in the “comparison of price ratio”.

A well known indicator is Price-to-Earnings (PE) ratio. However, mere PE ratio is not comprehensive enough when comparing the price ratio over a broad range of stocks.
Thus, a weighted formula utilizing various price ratios shows higher stability in outperforming returns.

The ratios:

  1. Earning Yield
  2. Enterprise Yield
  3. Free Cash Flow Yield
  4. Gross Profit Yield
  5. Book Value Yield

 

The effectiveness of the price ratios can be seen from the following chart over years:

Earning  EBITDA EBIT FCF Gross Profit Book Value S&P
CAGR  12.44% 13.72% 14.55% 11.68% 13.51% 13.11% 9.52%
standard D  17.62% 17.25% 17.20% 16.42% 18.35% 17.39% 15.19%
lower D 12.17% 11.49% 11.34% 11.00% 12.93% 11.12% 10.66%
Sharpe 0.46 0.53 0.58 0.44 0.50 0.50 0.33
Sortino MAR=5% 0.68 0.82 0.89 0.68 0.73 0.80 0.50
MaxDD -49.01% -43.45% -37.25% -44.54% -56.87% -49.20% -50.21%
worst month -22.02% -18.66% -18.43% -20.83% -24.86% -22.37% -21.58%
best month 25.75% 16.95% 17.21% 16.56% 29.74% 28.59% 16.81%
profit months 60.42% 62.85% 61.46% 61.11% 61.63% 61.63% 60.94%