Composite Factors

O'Shaughnessy VC1

Value Composite One (VC1) is a composite factor introduced by James O'Shaughnessy in the 4th edition of his book 'What Works on Wall Street'. This factor combines balance sheet and cash flow factors into what he calls a "pure play" combined value factor. It's made up of the following 5 factors.

  1. Price-to-Book
  2. Price-to-Earnings
  3. Price-to-Sales
  4. EBITDA/EV
  5. Price-to-Cash flow

Instead of ranking stocks on each ratio, stocks are grouped into 100 groups equal groups (percentiles), from 1 to 100. This is done on each ratio. If a company is in group 1, that means it's in the best 1%. If the ratio is missing, a neutral score of 50 is assigned. The scores for each ratio are summed up to get a combined score. Based on this value, companies are again grouped from 1 to 100.A company with a VC1 of 1 is in the 1% cheapest companies according to the combination of those 5 factors. Companies with a VC1 of 100 are the most expensive.

The scorecard also displays variants of the VC1 where the score is calculated for the selected company compared to peer companies in the same industry, industry group or sector.

Please note that we use Book-to-Market instead of P/B since it allows a more accurate sorting compared to P/B. Stocks with a high B/M show up at the top of the list, stocks with negative B/M are at the bottom of the list. For the same reason we use Earnings-to-Price instead of Price-to-Earnings and Cash flow-to-price instead instead of Price-to-Cash flow.

Also important is that we always make sure that companies with the same score get added to the same percentile. For stock universes where the number of stocks is less than 100, we make sure that the stocks are still allocated to percentiles from 0 to 100 instead of 0 to the total number of stocks. This is particularly relevant for the industry, industry group or sector variants where if additional filters are used, the number of stocks often drops below 100.

New! The VC1 score is now fully dynamic and is 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.


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In our glossary:

  • O'Shaughnessy VC2

    Value Composite Two (VC2) is an adaptation of the VC1 factor described above. more...
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  • Price-to-Cash flow

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In our scorecard manual:

  • O'Shaughnessy VCs

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