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 five factors.
- Price-to-Cash flow
Instead of ranking stocks on each ratio, stocks are grouped into 100 equal groups (percentiles) from 1 to 100. This is done on each ratio. If a company is in group 1, 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 five 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 than P/B. Stocks with a high B/M are at the top of the list, and stocks with a negative B/M are at the bottom. For the same reason, we use Earnings-to-Price instead of Price-to-Earnings and Cash flow-to-price 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.
In our screens:
O'Shaughnessy Trending ValueIn the fourth edition of his bestselling value quant book 'What works on Wall Street', James O'Shaughnessy devised anew screen which is called "the top stock-market strategy of the past 50 years".. more...
In our blog:
Which magic formula is the most popular(Intro from the June 2014 edition of the systematic value investor newsletter)Over the past 5 years we gathered quite a few screens and ratios.. more...
New KPI : Value Factor One - BacktestThe problem with single-factor valuation ratios is that they move “in and out of favor” and can significantly underperform the overall market over any given 10-year period despite their long-term outperformance.The solution ?A valuation factor that uses a few valuation measures overcomes this problem by giving you a list of undervalued companies based on a few valuation measures and thus more consistent returns.The use of a “value composite” to measure undervaluation rather than using the single valuation ratio of, for example, price-to-sales or book to market.O’Shaughnessy found that stocks selected based on the value composite outperformed stocks scoring highest on any single value factor 82% of the time in all 10-year rolling periods between 1964 and 2009.. more...
In our glossary:
O'Shaughnessy VC2Value Composite Two (VC2) is an adaptation of the VC1 factor described above.. more...
O'Shaughnessy VC3Value Composite Three (VC3) is another adaptation of O'Shaughnessy's value composite, but here he combines the factors used in VC1 with buyback yield.. more...
Price-to-Cash flowThis ratio compares the share price of the company to how much cash it's generating per share.. more...
In our scorecard manual:
O'Shaughnessy VCsValue Composites were introduced by O'Shaughnessy in the 4th edition of 'What works on Wall Street'.. more...