Composite Factors

O'Shaughnessy VC3

Value Composite Three (VC3) is another adaptation of O'Shaughnessy's value composite, but here he combines the factors used in VC1 with buyback yield. This factor is interesting for investors who're looking for stocks with the best value characteristics but are indifferent to whether these companies pay a dividend.

VC3 is the combination of the following factors:

  1. Price-to-Book
  2. Price-to-Earnings
  3. Price-to-Sales
  5. Price-to-Cash flow
  6. Buyback Yield

As with the VC1 and VC2, companies are grouped 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, and 100 is expensive.

The scorecard also displays variants of the VC3 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 VC3 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.

Related Articles

In our screens:

  • O'Shaughnessy Trending Value

    In 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 - Backtest

    The 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 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'.. more...
  • O'Shaughnessy VC2

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

    This ratio compares the share price of the company to how much cash it's generating per share.. more...

In our scorecard manual:

  • O'Shaughnessy VCs

    Value Composites were introduced by O'Shaughnessy in the 4th edition of 'What works on Wall Street'.. more...