Value Composite Two (VC2) is an adaptation of the VC1 factor described above. O'Shaughnessy found that the addition of shareholder yield can improve the results of the pure play Value Factor One. This composite is the combination of the following factors:
- Price-to-Cash flow
- Shareholder Yield
As with the VC1, companies are put into groups from 1 to 100 for each ratio and the individual scores are summed up. This total score is then put into groups again from 1 to 100. 1 is cheap, 100 is expensive.
O'Shaughnessy uses the VC2 factor in his trended value screen, which is described in more detail here.
The scorecard also displays variants of the VC2 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 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 VC2 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 VC1Value Composite One (VC1) is a composite factor introduced by James O'Shaughnessy in the 4th edition of his book 'What Works on Wall Street'.. 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...