Perspective

Are Value Stocks Cheap for a Fundamental Reason?

Topics - Value Factor/Style Investing

${ numberSection } ${ text }
Are Value Stocks Cheap for a Fundamental Reason?

We have been discussing the attractiveness of the value factor for many months based on the unusually high value spread, which compares the valuation multiples of expensive stocks to cheap stocks. This metric is still extremely cheap… 90th+ percentile cheap across all regions.

 

Value Spreads for Hypothetical AQR Industry-and-Dollar-Neutral Value Portfolios*

January 1, 1984 – June 30, 2021

*Spreads are constructed using the Hypothetical AQR Value portfolio as described below, and are adjusted to be dollar-neutral, but not necessarily beta-neutral through time.
Source: AQR. Hypothetical value composite includes four value measures: book-to-price, earnings-to-price, forecast earnings-to-price, and sales-to-enterprise value; spreads are measured based on ratios. To construct industry-neutrality, the value spreads are constructed by comparing the aforementioned value measures within each industry,  which are then aggregated up to represent an entire portfolio. Hypothetical data has inherent limitations, some of which are disclosed in the Disclosures. Please see the Hypothetical AQR U.S. Large Cap, International, and Emerging Valuation Theme Model Descriptions in the Disclosures. For illustrative purposes only and not representative of an actual portfolio AQR currently manages. Please read the Disclosures for important disclosures.
 

Show more


We think this signals an unusually attractive forward-looking return for the value factor, but some investors have wondered if value is cheap for a reason. Maybe the fundamental prospects for value stocks are unusually poor today, justifying the high value spread? This is by far the most popular question we get from skeptics. And, yes, we have an answer that doesn’t require a four-hour time commitment nor a PhD (though finance PhDs may also be able to follow along). In a recent webisode, “Are Value Stocks Cheap for a Fundamental Reason?,” we explain why we look at the value spread, and why the current high value spread is forecasting high expected returns, not lower than usual fundamental growth rates for cheap versus expensive stocks. And we cover all of this in five minutes. We encourage all investors, both skeptics and value geeks, to listen to this new webisode, and we welcome any feedback.


Disclosures

Hypothetical AQR U.S. Large Cap, International, and Emerging Markets Valuation Theme Model Descriptions: 
The AQR Value Portfolio model utilizes the full set of underlying factors that compose the Valuation theme within AQR’s Global Stock Selection strategy to evaluate stocks and create a long-short, market-neutral and industry-neutral equity portfolio based exclusively on these signals. The Valuation Theme is designed to capture the tendency for relatively cheap assets to outperform relatively expensive ones. Model returns are gross of advisory fees and transaction costs from September 1, 1984 – June 30, 2021. Regional data begins at varying dates: Emerging (October 1994), Europe (February 1990), U.S. (January 1984), Canada (February 1990), Japan (January 1990), Australia (January 1994), Developed Asia (January 1990). The investment universes include a broad subset of liquid tradeable large cap stocks within the various regions. The risk models used are the Barra U.S. Equity Risk Model (USE3L), Barra Developed Equity Risk Model (BIMDEV_noCURR_301L), and Barra Global Equity Risk Model (GEM3L_noCurr).


The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. 

Past performance is no guarantee of future results. 

Diversification does not eliminate the risk of experiencing investment loss. 

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. 

There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. 

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH, BUT NOT ALL, ARE DESCRIBED HEREIN. NO REPRESENTATION IS BEING MADE THAT ANY FUND OR ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN HEREIN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY REALIZED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS THAT CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. 

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites. Information contained on third party websites that AQR Capital Management, LLC, (“AQR”) may link to are not reviewed in their entirety for accuracy and AQR assumes no liability for the information contained on these websites. 

Information contained on third party websites that AQR Capital Management, LLC, (“AQR”) may link to are not reviewed in their entirety for accuracy and AQR assumes no liability for the information contained on these websites. 

This document is not research and should not be treated as research. This document does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. This document has been prepared solely for informational purposes. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.