In 2023, we introduced a quantitative rules-based momentum strategy. As we have looked at a variety of other quantitative strategies, another strategy stands out as a potential addition to our focus and it is the Value Strategy.
At a high level, Value investing is about finding companies that represent the best value for money at their current price. Finance literature and narratives about security valuation and value investing are pervasive in the markets today but a few key elements of Value investing can be summarized as below.
Valuing a company is part art and part math – There is this adage that value is in the eye of the beholder but when valuing companies several metrics such as Price to Book ratio, Price to Sales ratio, Price to Earnings (P/E) ratio, Dividend discount model, Discounted Cash Flow model and others are used to arrive at a value.
Some Value strategies focus on a few of the above models and rank companies based on one or many of the valuation metrics.
For e.g., a model in the market is to look at low Price/Book values and invest in those companies for the longer term.
Valuation is also done on a relative basis comparing a company against its peers and the overall sector in which the company operates.
Other valuation models use Return on Equity, Return on Assets etc., as metrics to arrive at a value.
In summary, estimating the value of a security/company can be a complex task mired in evaluating the financials of the company and arriving at an absolute and relative value. Given the complexity of such a fundamental analysis, there seems to be an opportunity to pursue value investing with a combination of rules and metrics. For example, there is one value investing strategy in the market that ranks securities/stocks by their Price/Book ratio and it goes long the ones with low P/B ratio and goes short the ones with high P/B ratios with periodic rebalancing.
In January 2024, QuantMomo also added a value strategy. Value is a factor investment strategy with a focus on identifying stocks which offer the best value for the price of the stock. The focus of this strategy is to identify stocks with compelling valuation metrics on their balance sheet and income statements and rebalancing them yearly. In the recent past, value stocks have underperformed compared to growth stocks and this strategy is a very long term strategy to ride the resurgence of value stocks when it happens. History has shown that value stocks tend to eventually outperform. While we won’t go into the details of the statistics, we would like to mention that there is a lot of research on the public domain about value stocks and we encourage our followers to review them. QuantMomo’s Value strategy did not perform well but did not lose a lot of money and the performance is flat. Please see our detailed blog post (link below).
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