Value Composites were introduced by O'Shaughnessy in the 4th edition of 'What works on Wall Street'. O'Shaughnessy found that instead of looking at individual factors on their own, returns were considerably higher when combining them together. He called them 'value composites' and created 3 versions of them. You can find more details on the calculation by clicking here.
O'Shaughnessy calculates his value composites on the full universe of stocks. A VC of 1 means that the company is in the 1% cheapest stocks in the universe. This however does not take into account the different characteristics of industries or sectors. The average P/E, P/B and other ratios can vary considerably as you can see in the following overview.
For this reason we created 3 alternative calculations for each of the VCs. Instead of calculating percentiles for each component over the entire stock universe, we calculated the percentile within the sector, industry group and sector. You can see the results in the grid below:
This company is very cheap when looking at VC1 and VC2 (which adds shareholder yield as one of the factors). The VC3 is higher as the company buys back relatively little shares compared to all other stocks.
When we look at the industry column however, we see that the company is not that cheap after all and has a VC1 of 51. The VC3 increases to 70, which puts it in the red.
The overall conclusion is that the stock is cheap when comparing to all stocks but this is partly because of the fact that it operates in an industry where the ratios are typically lower than average. By making the VC industry, industry group or sector agnostic, you get a better view on whether it's a real bargain or not. Please note that we have not yet conducted any study on this so we don't know whether these group VCs have similar predictive capabilities as the pure VCs as designed by O'Shaughnessy.
New! All value composites are now fully dynamic and calculated on a filtered stock universe using the filters specified in the Filter Menu. The filters taken into account are: countries, markets, industries, market cap, trading value, results age and currency.