How Do Value Strategies Stack Up Against Each Other?

Value + Quality reigns as the Clear Winner.

  • 4 Widely Used Strategies including Growing Dividends, Deep Value, Value & Quality small caps, Value & Quality large caps, Piotroski
  • 15 positions per strategy, equal-weighted, annual rebalance
  • Study period: 1999 – 2016 (October 31)
  • Deep value delivered the highest absolute returns while “Magic Formula” stocks (undervalued + high return on capital) provided the highest risk-adjusted returns (as measured by Sharpe ratio)

Performance Summary         

1. Deep Value
This strategy is a variation on the Ben Graham Net Current Asset Value strategy (Current Assets – Current Liabilities) in that in seeks out companies trading at less than ⅓ of their net current asset value OR less than ½ of their net-net working capital and PE ratios less than 5.  Note that few companies pass this screen, especially with realistic liquidity and price constraints, as witnessed by some years when 10 stocks or fewer met these criteria.  Long term performance is very good but volatile, with much higher absolute returns than the S&P 500 but with significantly more volatility and slightly greater drawdowns.cbcbcbc
2. Growing Dividends
This strategy seeks out businesses with dividends that have grown in four out of the last five years and at a rate faster than than the universe of S&P 500 stocks.  There is also a value component, requiring either a price/cash flow  or price/earnings < 10.olllo
3. Magic Formula (small-mid caps)
This is an updated performance snapshot of the strategy popularized by Joel Greenblatt.  This strategy looks for businesses with low price / earnings ratios (specifically, EBIT / Enterprise Value) and a high return on capital.  Put simply, the idea is to buy good businesses at a good price.  The emphasis is on small to mid-cap stocks.  Among the strategies tested this one delivered the highest risk-adjusted returns during the nearly 18-year time period.

4. Piotroski F-Score
This strategy was first developed and popularized by Joseph Piotroski, accounting professor at Stanford.  He developed the Piotroski F-Score,  a tool that evaluates businesses on nine measures of financial health, including return on assets, current ratio, change in asset turnover and change in gross margin, among other factors.  He looks for companies that score highly on at least 8 out of the 9 measures and whose book-to-market ratios are in the top 20%.  




All models require a minimum average daily share volume of 200,000 shares and a mimium daily dollar volume of $1,500,000.

Trading Rules

Stocks are bought and sold annually on the first trading day of each year and at the average of the high and low price for that day. Fixed slippage of 0.25% of a trade amount was applied to provide for transaction slippage and brokerage fees. No market timing was applied.  Positions are equal-weighted and were either sold or re-balanced to equal weight at the beginning of each new holding period.

No Hedging

This model does not involve any portfolio hedging and assumes a fully invested portfolio at all times.

One should be aware that all results shown are from a simulation and not from actual trading. All results are presented for informational and educational purposes only and shall not be construed as advice to invest in any assets. Out-of-sample performance may be much different. Backtesting results should be interpreted in light of differences between simulated performance and actual trading, and an understanding that past performance is no guarantee of future results. All investors should make investment choices based upon their own analysis of the asset, its expected returns and risks, or consult a financial adviser.