NJ Value Factor

Value Factor

Paying too much for your stocks? Consider the Value Factor.

The name Benjamin Graham is synonymous with value investing. Mr. Graham and co-author David Dodd released the influential book “Security Analysis” in 1934. (Graham & Dodd, 2008). This book provided a formula to calculate a company's intrinsic value based on its long-term growth potential and Earnings Per Share (EPS). And while this formula was improved upon in his follow-up book, "The Intelligent Investor" (Graham, 2013), which was published in 1974, its fundamental principles have remained the same for almost a century.

Value Investing

Value investing's fundamental tenet still revolves around buying stocks whose intrinsic value is higher than their current market price. However, its effective application depends on also being able to predict a company’s growth rate accurately and as a result, the exact formula isn’t commonly used in factor investing. Instead, factor investing focuses on Price to Book Value (P/B), Price to Sales (P/S), Price to Earnings (P/E), and Dividend Yield to measure value.

Value Factor Measured

Index providers across the world now publish factor indexes using various definitions of the factors.

A simple way to ascertain the most popular definitions of value across the world is to inspect the definitions used by the various index providers for their value indexes. A summary of the same is in the table below.

 Index Details  Factor Characteristics  Methodology
Index Name: FTSE Value
Factor Index
Index Provider: FTSE Russell
Cash flow yield, earnings yield and P/S Tilt the market capitalisation index by using a composite score
Index Name: MSCI Enhanced
Value Index
Index Provider: MSCI Inc.
Forward P/E, P/B, and Enterprise value to operating cash flow Tilt the market capitalisation index using the composite score and target a fixed number of stocks, targeting 30% market capitalisation coverage.
Index Name: S&P Enhanced
Value Index
Index Provider: S&P Dow
Jones Indices LLC
P/B, P/E and P/S Tilt the market capitalisation index by targeting a fixed percentage of constituents in the market capitalisation index.
Index Name: Dow Jones U.S.
Large-Cap Value Total Stock
Market Index
Index Provider: S&P Dow
Jones Indices LLC
Projected P/E, Projected 3-5 Yr Operating EPS Growth, P/B, Div Yield, Trailing Revenue Growth (5 Yr), Trailing EPS Growth (Last 21 quarters) Tilt the US Large-Cap Total Stock Market Index (float-adjusted capitalisation-weighted) towards its constituents classified as “value” using a 6-factor composite score and cluster analysis.
Index Name: Nifty 500 Value
50 Index
Index Provider: NSE Indices
E/P, B/P, Sales/Price, Dividend Yield Tilt the Nifty 500 Index (capitalisation-weighted) towards specific constituents based on a weighted-average “Value” score and free-float market capitalisation.
  • Source: Author, methodology and factsheets from FTSE Russell, MSCI Inc, S&P Dow Jones Indices LLC, NSE Indices Ltd
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