Who says a stock is either "value" or "growth"?

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privatefarmer
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How can we trust Morningstas index methodology???

Post by privatefarmer »

If you buy a small-cap value ETF such as JKL and it says that they buy SCV companies based on morningstar's index methodology, how can we trust that this methodology is even accurate??? It is morningstar that is saying whether a company is undervalued or not, is this not active investing/stock picking?? Who is morningstar to say whether a company is undervalued??

My main point : I understand that historically SCV's have outperformed TSM but going forward how can we trust any service, Morningstar or anyone else, to "predict" which companies are undervalued? Is there any point to trusting their indexing "methodology" or should we just invest in the TSM and accept that nobody can predict what a company's "true" value should be and thus nobody can predict whether a company will turn out to be undervalued or overvalued/growth.

Thanks, I hope my point came across clearly. I am still a young/learning investor but it is my understanding that whether a stock falls into the "value" or "growth" sector solely depends on a service such as Morningstar rating it as "undervalued", "over valued" or "fairly valued"...
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Re: How can we trust Morningstas index methodology???

Post by in_reality »

privatefarmer wrote: Thanks, I hope my point came across clearly. I am still a young/learning investor but it is my understanding that whether a stock falls into the "value" or "growth" sector solely depends on a service such as Morningstar rating it as "undervalued", "over valued" or "fairly valued"...
I don't see the connection. Value stocks can be overvalued. Growth stocks can be undervalued.

Value or Growth is determined by something like book to market measures. How much of the companies value is attributed to physical assets of the company (high = value)? How much of the company's value is attributed to expected future revenues (high = growth)?
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Who says a stock is either "value" or "growth"?

Post by privatefarmer »

[Thread merged into here, see below. --admin LadyGeek]

If you buy a small-cap value ETF such as JKL and it says that they buy SCV companies based on morningstar's index methodology, how can we trust that this methodology is even accurate??? It is morningstar that is saying whether a company is undervalued or not, is this not active investing/stock picking?? Who is morningstar to say whether a company is undervalued??

My main point : I understand that historically SCV's have outperformed TSM but going forward how can we trust any service, Morningstar or anyone else, to "predict" which companies are undervalued? Is there any point to trusting their indexing "methodology" or should we just invest in the TSM and accept that nobody can predict what a company's "true" value should be and thus nobody can predict whether a company will turn out to be undervalued or overvalued/growth.

Thanks, I hope my point came across clearly. I am still a young/learning investor but it is my understanding that whether a stock falls into the "value" or "growth" sector solely depends on a service such as Morningstar rating it as "undervalued", "over valued" or "fairly valued"...
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Re: Who says a stock is either "value" or "growth"?

Post by patrick »

The distinction of growth and value isn't quite the same as a prediction as to which companies are undervalued. You might expect a "value" company to outperform because it is a good value, but you'd also expect a "growth" company to outperform because it is going to grow!

The research showing the outperformance of values is based on categorizing based stocks according to various valuation metrics in comparison to the market as a whole, with price/book ratio as the foremost choice. The indices used for most funds usually use a combination of a few metrics such as price/book as well as price/earnings and dividend yield to decide which stocks go in the growth or value indices. Actively managed growth or value funds on the other hand are just whatever the active manager feels should be included, which often has little relation to the valuation ratios.
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Re: Who says a stock is either "value" or "growth"?

Post by avalpert »

As patrick said, whether a stock is value or growth is based on objective measures of value that anyone can validate - it isn't a black box selection committee or anything like that. the research has shown that some of these measures serve as reliable proxies for identifying 'value stocks' that have shown to have an associated risk premium historically.
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Re: Who says a stock is either "value" or "growth"?

Post by LadyGeek »

privatefarmer - I moved your duplicate thread into here, which is the Investing - Theory, News & General forum.

Rather than make a general statement, can you give a few specific examples? That way, we can deep dive into the rationale for why (or why not) the selection was made.
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Re: Who says a stock is either "value" or "growth"?

Post by privatefarmer »

Thanks for the replies everyone. I have read that small-cap value stocks have outperformed TSM ~2% over the last 100+ years; so does this mean that if you were to have invested in stocks w/a lower P/E or Price:book ratio compared to their peers that you would have done better than the TSM over this time frame? Maybe this is basic knowledge and I apologize if I am missing the basics when it comes to investing.

My bigger point is, take JKL for example, this ETF states that it uses Morningstar's indexing methodology to determine which stocks are SCV and then it buys those. Okay, but can we equate morningstar's indexing methodology w/ historical "small cap value" equities? Can we assume that since historically SCVs have a ~2% risk premium that the stocks that Morningstar selects as "SCV" will also have this 2% risk premium? Or is there maybe no guaranteed connection between historical SCV equities and the indexing methodology that Morningstar uses today?

Maybe these are ridiculous questions but I am just trying to fully understand why or why not we should expect a value premium in the future and if we can rely on Morningstar, or any other service for that matter, to accurately place stocks as either value or growth. Thanks everyone
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Re: Who says a stock is either "value" or "growth"?

Post by bertilak »

There have been empirical studies showing that companies with high "book to market" (btm) values outperform companies with low btm values. "Value" is shorthand for high btm and "growth" is shorthand for low btm. It is a continuum.

"Book" means adding up all the assets owned by the company and "Market" means the share price. Both book and market values are public information. The concept is therefore basically objective although the accounting methods used by the companies to measure book value may have a bit of wiggle room. So "value" and "growth" are definitions, not judgement calls. Being objective it can be indexed although different indexes may draw lines on that continuum in different places.

I guess the idea is that a company's assets (book value) determine the ultimate long-term ability of the company to make money AND that (for some reason) Mr. Market often underestimates this by pricing at least some value stocks too(?) low. Perhaps there is good reason, for example it might be that a company's stock is priced low because the company has some handicap (e.g. shrinking market). Perhaps the only reason is that investors have a universal inability to price things right in this respect. There are theoretical studies that try to answer the question of WHY value stocks outperform. WHY, not IF; outperformance has been measured empirically. Is it a risk story or a behavioral story? Something else?

Anyway, I think the above is basically correct although I am not an academic so I probably have missed some subtleties and may not have my terminology exactly correct.
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Re: Who says a stock is either "value" or "growth"?

Post by steve roy »

My understanding is that "value" stocks (small, large or midcap) aren't always value but move around, depending on book-to-market.

So ... a small cap value stock could become a small cap growth stock. And the reverse.
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Re: Who says a stock is either "value" or "growth"?

Post by richard »

privatefarmer wrote:Thanks for the replies everyone. I have read that small-cap value stocks have outperformed TSM ~2% over the last 100+ years; so does this mean that if you were to have invested in stocks w/a lower P/E or Price:book ratio compared to their peers that you would have done better than the TSM over this time frame? Maybe this is basic knowledge and I apologize if I am missing the basics when it comes to investing.

My bigger point is, take JKL for example, this ETF states that it uses Morningstar's indexing methodology to determine which stocks are SCV and then it buys those. Okay, but can we equate morningstar's indexing methodology w/ historical "small cap value" equities? Can we assume that since historically SCVs have a ~2% risk premium that the stocks that Morningstar selects as "SCV" will also have this 2% risk premium? Or is there maybe no guaranteed connection between historical SCV equities and the indexing methodology that Morningstar uses today?

Maybe these are ridiculous questions but I am just trying to fully understand why or why not we should expect a value premium in the future and if we can rely on Morningstar, or any other service for that matter, to accurately place stocks as either value or growth. Thanks everyone
Past data appears to indicate that SCV (defined based on book to market) has outperformed TSM. Book to market is a mechanical test. Check book value from published accounting data and look up the market price.

Theories as to why it has outperformed include (1) SCV is riskier and the outperformance is a reward for taking that risk, (2) behavioral issues lead investors to prefer TSM and (3) random chance.

There is no guarantee that SCV will continue to outperform. The issue is not the indexing methodology.
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Re: Who says a stock is either "value" or "growth"?

Post by richard »

bertilak wrote:There have been empirical studies showing that companies with high "book to market" (btm) values outperform companies with low btm values. "Value" is shorthand for high btm and "growth" is shorthand for low btm. It is a continuum.
Studies have shown that high btm companies have outperformed - you should write in the past tense, not the present.

BTM is the most common definition of value in this context, although other measures can be used, such as p/e.
bertilak wrote:"Book" means adding up all the assets owned by the company and "Market" means the share price. Both book and market values are public information. The concept is therefore basically objective although the accounting methods used by the companies to measure book value may have a bit of wiggle room. So "value" and "growth" are definitions, not judgement calls. Being objective it can be indexed although different indexes may draw lines on that continuum in different places.
Yes. Book is the value of the companies assets as reflected on its accounting records. Given accounting rules, this means book does not necessarily reflect economic reality, which causes some to doubt that the entire value stock story.
bertilak wrote:I guess the idea is that a company's assets (book value) determine the ultimate long-term ability of the company to make money AND that (for some reason) Mr. Market often underestimates this by pricing at least some value stocks too(?) low. Perhaps there is good reason, for example it might be that a company's stock is priced low because the company has some handicap (e.g. shrinking market). Perhaps the only reason is that investors have a universal inability to price things right in this respect. There are theoretical studies that try to answer the question of WHY value stocks outperform. WHY, not IF; outperformance has been measured empirically. Is it a risk story or a behavioral story? Something else?

Anyway, I think the above is basically correct although I am not an academic so I probably have missed some subtleties and may not have my terminology exactly correct.
Close enough. :happy
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Re: Who says a stock is either "value" or "growth"?

Post by Valuethinker »

Re Book Value

Book Value = (Assets - Liabilities) / number of shares in issue What I call Net Asset Value per share (I think the Book number is US GAAP usage, in IFRS/ UK GAAP it is called Net Asset Value).

That's important. A lot of high book to market (low price to book) shares are heavily indebted. They will go broke. Small cap value stocks are often the companies right on the edge, not just companies out of favour with the market for sentiment or other reasons.

I think people in this discussion realize this but skimming the discussion it got left off a few of the explanations?

It's a finance puzzle as to why an accounting number should be such a good guide to market value. Generally accounting does not use market values to record assets, but book cost (technically lower of cost or Net Realizable Value). Therefore the assets of the company should in most cases (REITs would be an exception, due to regular revaluations of assets) significantly understate their market value. If we think about assets:

Current assets like inventories are held at cost, not salable value

Fixed assets are subject to depreciation or amortisation (for intangibles) and therefore are reducing in value all the time

Own brands (eg Coke, Disney) are not valued on the BS, only acquired brands. So much of the value of a company like Coke or Disney is not actually on the BS, AFAIK. I am no expert on resource stocks, but my understanding is that reserves of mineral ore or petroleum are not reported on the BS, and therefore analysts spend a lot of time creating metrics like price per barrel of proved and probable reserves (ie greater than 50% chance of extraction).

This is one of those issues that finance understands empirically, but not theoretically. Of all the different measures of 'value', P/B (high BTM) is the most durable and stable one.
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Re: Who says a stock is either "value" or "growth"?

Post by privatefarmer »

Thx for the replies everyone.

One last question : do the studies indicate that buying and holding a basket of under valued equities have out performed or do the indicate that buying an index find which constantly buys/sells equities as they move between the style boxes, to maintain a valued tilt, have out performed?

Can I buy a value tilted index fund or etf and expect it to out perform TSM over the long term or should I be buying and holding individual undervalued equities?


Thanks again everyone this forum is the most help one can receive.
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Re: Who says a stock is either "value" or "growth"?

Post by Valuethinker »

privatefarmer wrote:Thx for the replies everyone.

One last question : do the studies indicate that buying and holding a basket of under valued equities have out performed or do the indicate that buying an index find which constantly buys/sells equities as they move between the style boxes, to maintain a valued tilt, have out performed?

Can I buy a value tilted index fund or etf and expect it to out perform TSM over the long term or should I be buying and holding individual undervalued equities?


Thanks again everyone this forum is the most help one can receive.
I believe the studies typically bought top decile book to market (lowest decile price to book) and held those stocks for a time-- I think later studies did it all the way until they reached the median btm level. One would have to check, but generally that is how it was done: buy the highest decile (lowest in normal speak) and then sell when they had climbed back to more 'normal' valuations-- just not sure at what level.

The indices are constructed by weighting different value factors - different fund companies and index providers use different weightings on P/Sales, Div/ Price, P/B, P/E (mostly the latter 2).
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Re: Who says a stock is either "value" or "growth"?

Post by nisiprius »

One source of confusion is that there are two different uses of the world "value stocks."

One of them antedates Fama and French, and refers to the kind of investing presented by Graham and Dodd in "Securities Analysis:" the careful, detailed inspection of many aspects of a business and its finances, in hopes of identifying undervalued stocks. This kind of selection is practiced by "value investors," some of whom manage or managed funds (Bill Miller) and some of whom manage businesses (Warren Buffett).

The other one refers to Fama and French's work, which consisted of performing a statistical procedure called "factor analysis," which takes a collection of things that are described by many different parameters, and seeks to find combinations of those parameters, called "factors," such that the smallest number of factors explains the greatest amount of variation. It is sort of like the discovery of vitamins in food--most of the anti-scorbutic power of limes is explained by the presence of Vitamin C. Two of their factors were named "growth" and "value" because they corresponded well to those concepts, but their measures of "growth" and "value" are not laser-sharp tools for isolating specific individual stocks.

A service such as Morningstar can be trusted to measure how a mutual fund "loads" on the size or value factors because those factors are simple calculations laid out by Fama and French. A mutual fund that shows up in Morningstar's "small value" box is a mutual fund that indeed contains stocks that load heavily on the "small value factor." That does not mean it has magically done the same thing as a "value investor" who performs deep analyses of individual stocks does. As to how "small value stocks" as measured by the small value factor will behave in future, that is indeed a mystery.
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Re: Who says a stock is either "value" or "growth"?

Post by nedsaid »

Valuethinker wrote:Re Book Value

Book Value = (Assets - Liabilities) / number of shares in issue What I call Net Asset Value per share (I think the Book number is US GAAP usage, in IFRS/ UK GAAP it is called Net Asset Value).

That's important. A lot of high book to market (low price to book) shares are heavily indebted. They will go broke. Small cap value stocks are often the companies right on the edge, not just companies out of favour with the market for sentiment or other reasons.

I think people in this discussion realize this but skimming the discussion it got left off a few of the explanations?

It's a finance puzzle as to why an accounting number should be such a good guide to market value. Generally accounting does not use market values to record assets, but book cost (technically lower of cost or Net Realizable Value). Therefore the assets of the company should in most cases (REITs would be an exception, due to regular revaluations of assets) significantly understate their market value. If we think about assets:

Current assets like inventories are held at cost, not salable value

Fixed assets are subject to depreciation or amortisation (for intangibles) and therefore are reducing in value all the time

Own brands (eg Coke, Disney) are not valued on the BS, only acquired brands. So much of the value of a company like Coke or Disney is not actually on the BS, AFAIK. I am no expert on resource stocks, but my understanding is that reserves of mineral ore or petroleum are not reported on the BS, and therefore analysts spend a lot of time creating metrics like price per barrel of proved and probable reserves (ie greater than 50% chance of extraction).

This is one of those issues that finance understands empirically, but not theoretically. Of all the different measures of 'value', P/B (high BTM) is the most durable and stable one.
This is an excellent post, Valuethinker. You are correct about the accounting issues, assets are carried on the books at lower of cost or market. For example, real estate kept on the books for decades may be significantly understated on the balance sheet. Another example would be the franchise or brand value of a business, that is the reputation of its goods and services that are produced by the company. That is clearly worth a whole lot but very hard to put a value on.

To me a Growth Stock is a company with consistently growing earnings. A company that grows faster than the growth of the economy as a whole. That is my definition.

A Value Stock is a company that falls beneath the valuation standards for the market as a whole or for its industry group. Companies that are having temporary but fixable problems or that are being ignored by Wall Street. Or it could be a company with consistently growing earnings but with a P/E ratio below what other such companies with similar growth rates. A Value Stock could be a company in very big trouble with a new management brought in to turn things around. Typically, a value stock is experiencing problems with decreasing earnings or inconsistent earnings. Or outright losses. Perhaps a company with plenty of room for cost cutting.

No matter how careful you are doing this, you will get dogs in there. The turn-around situation that doesn't turn around. A dying company in a dying industry. A poorly run company that has a low price for a very good reason. Even the best investors can't always tell the difference.

You have to look at what is behind the numbers. The numbers by themselves without additional background don't always tell the story. There are cases where the numbers are just wrong. Sometimes you have to pop open the hood and see what is underneath.
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Re: Who says a stock is either "value" or "growth"?

Post by DonCamillo »

Doesn't Vanguard just divide the S&P 500 in half by P/E and call the low P/E companies the S&P 500 Value Fund/ETF and the high P/E companies the S&P 500 Growth Fund/ETF?

All you have to do is choose your metric, P/E, Book Value, Cash Flow, Yield, and what percentage of the market you want to create your own division of Value vs. Growth. On a lot of metrics, most of the same stocks would be clustered at the two ends of the spectrum.
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Re: Who says a stock is either "value" or "growth"?

Post by avalpert »

DonCamillo wrote:Doesn't Vanguard just divide the S&P 500 in half by P/E and call the low P/E companies the S&P 500 Value Fund/ETF and the high P/E companies the S&P 500 Growth Fund/ETF?
No, they don't do that at all. The S&P 500 has nothing to do with their core investor value/growth funds (they do have an institutional fund and a small ETF that tracks it). The primary index family they use currently is the CRSP indexes. And neither the CRSP nor S&P just divide their universe in half by P/E to determine value/growth. They both use multifactor analysis to rank the 'valueness' and 'growthness' of each individual security and assign it to one asset class or another based on those value (they can end up in both funds).

CRSP looks at book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio for value and future long-term growth in EPS, future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets for growth.
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Re: Who says a stock is either "value" or "growth"?

Post by JoMoney »

DonCamillo wrote:Doesn't Vanguard just divide the S&P 500 in half by P/E and call the low P/E companies the S&P 500 Value Fund/ETF and the high P/E companies the S&P 500 Growth Fund/ETF?

All you have to do is choose your metric, P/E, Book Value, Cash Flow, Yield, and what percentage of the market you want to create your own division of Value vs. Growth. On a lot of metrics, most of the same stocks would be clustered at the two ends of the spectrum.
Vanguard's index funds follow their respective indexes. Vanguard doesn't make the determination, the index provider does, which will vary depending on which fund you're looking at.
If you're specifically looking at Vanguard S&P 500 Growth ETF (VOOG) or the Vanguard S&P 500 Value ETF (VOOV) you might notice that it's not exactly divided in half and they both include a selection of stocks that are somewhere in between the extremes of both sides. But which stocks fall into which style is determined by S&P's methodology (not Vanguard).
The S&P U.S. Style Indices Methodology guide has details on how S&P makes the determination, but other indexes will use different methodologies
http://us.spindices.com/documents/metho ... -style.pdf
Image

Stocks will got back and forth to various styles over time, so these are active strategies. By using an index fund of an active style you're attempting to emulate the average performance of an active fund that fits that category. Not all active funds/managers stick to a single style though. Over time some active funds will have "style drift", if you're making your active bets on a particular "style" to achieve something you might prefer a style index that won't drift over time, if you're betting on a particular fund manager you might not care about style drift, and would prefer to have a manager making decisions on what to buy.
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Re: Who says a stock is either "value" or "growth"?

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Warren Buffett wrote: http://www.berkshirehathaway.com/letters/1992.html
... But how, you will ask, does one decide what's "attractive"? In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth." Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.
We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.
In addition, we think the very term "value investing" is redundant. What is "investing" if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening).
Whether appropriate or not, the term "value investing" is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics - a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield - are in no way inconsistent with a "value" purchase. ...
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Re: Who says a stock is either "value" or "growth"?

Post by Valuethinker »

FWIW

DFA is 'clever value'. They buy stocks on value characteristics which have historically outperformed (as befits U of Chicago grads) BUT they also practice clever dealing to minimize dealing costs (eg their 'sin list' of brokers who have dumped them in it, who thereby lose future commission) and they don't just sell when a value stock on recovery climbs out of the 'value' range (bottom price to book decile).

Vanguard is 'dumb value'. They track an index created by someone else, AFAIK. That opens you up to gaming by the hedge funds (that play index composition), the brokers (who can see you coming) and so you risk higher transactions costs and lower performance (you also miss the Momentum factor, which is what DFA is picking up).

However AFAIK the performance of the funds, at least in the US market, is similar?

So if I had the opportunity, I'd used DFA, but if I didnt' I'd not worry too much about it. Vanguard may have become more 'DFA like' given its size in its dealing strategies. And if it would free itself up from external indices, it might become cleverer still.

Note it's one reason why I (and Burton Malkiel in later editions of his book) really like VG Total Stock Market. The 'small cap value' effect is buried in there, you are getting it, but you don't have to worry too much about it. And a TSM should minimize dealing charges.

There is so much talk about Small Cap Value that I'd hold it to 20-30% of my portfolio. If you are at 50% and the SCV effect just 'goes away' it's really going to hurt. It's a very significant risk to underperformance.

Small Cap Value in International Developed and Emerging Markets is even more interesting, and the practical advantages of the DFA approach should be greater.

Without DFA I believe it is hard to find a 'valuesy' enough alternative in international markets.
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Re: Who says a stock is either "value" or "growth"?

Post by Valuethinker »

avalpert wrote:
DonCamillo wrote:Doesn't Vanguard just divide the S&P 500 in half by P/E and call the low P/E companies the S&P 500 Value Fund/ETF and the high P/E companies the S&P 500 Growth Fund/ETF?
No, they don't do that at all. The S&P 500 has nothing to do with their core investor value/growth funds (they do have an institutional fund and a small ETF that tracks it). The primary index family they use currently is the CRSP indexes. And neither the CRSP nor S&P just divide their universe in half by P/E to determine value/growth. They both use multifactor analysis to rank the 'valueness' and 'growthness' of each individual security and assign it to one asset class or another based on those value (they can end up in both funds).

CRSP looks at book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio for value and future long-term growth in EPS, future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets for growth.
Thank you. Good digging. Helpful.
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Re: Who says a stock is either "value" or "growth"?

Post by richard »

nedsaid wrote:
Valuethinker wrote:<>Current assets like inventories are held at cost, not salable value

Fixed assets are subject to depreciation or amortisation (for intangibles) and therefore are reducing in value all the time

Own brands (eg Coke, Disney) are not valued on the BS, only acquired brands. So much of the value of a company like Coke or Disney is not actually on the BS, AFAIK. I am no expert on resource stocks, but my understanding is that reserves of mineral ore or petroleum are not reported on the BS, and therefore analysts spend a lot of time creating metrics like price per barrel of proved and probable reserves (ie greater than 50% chance of extraction).

This is one of those issues that finance understands empirically, but not theoretically. Of all the different measures of 'value', P/B (high BTM) is the most durable and stable one.
This is an excellent post, Valuethinker. You are correct about the accounting issues, assets are carried on the books at lower of cost or market.<>
Not all, probably not most, assets are carried at the lower of cost or market. As Valuethinker writes, some assets are held at depreciated (or amortised) cost, which may or may not bear any relation to market (or economic) value. Further, how to value many assets on a company's books is subject to a substantial amount of judgment.

Issues such as this are why I wrote above: "Book is the value of the companies assets as reflected on its accounting records. Given accounting rules, this means book does not necessarily reflect economic reality, which causes some to doubt the entire value stock story." Proponents say the key is price to anything - we're trying to determine how expensive a stock is, so the anything is less important.
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nedsaid
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Re: Who says a stock is either "value" or "growth"?

Post by nedsaid »

avalpert wrote:
DonCamillo wrote:Doesn't Vanguard just divide the S&P 500 in half by P/E and call the low P/E companies the S&P 500 Value Fund/ETF and the high P/E companies the S&P 500 Growth Fund/ETF?
No, they don't do that at all. The S&P 500 has nothing to do with their core investor value/growth funds (they do have an institutional fund and a small ETF that tracks it). The primary index family they use currently is the CRSP indexes. And neither the CRSP nor S&P just divide their universe in half by P/E to determine value/growth. They both use multifactor analysis to rank the 'valueness' and 'growthness' of each individual security and assign it to one asset class or another based on those value (they can end up in both funds).

CRSP looks at book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio for value and future long-term growth in EPS, future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets for growth.
Thanks Avelpert for your excellent post. My foggy memory banks seem to recall that the "Value" and "Growth" indexes that Vanguard used to use were pretty much cutting the stock universe in half. It sounds like Vanguard is responding to the "smart value" and the "dumb value" criticisms like what Valuethinker brought up. It sounds like Vanguard is trying to better capture the "value" and "growth" characteristics in their respective style index funds.
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Stryker
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Re: Who says a stock is either "value" or "growth"?

Post by Stryker »

Larry Swedroe had a list of small cap value ETF's in an article just this past August.

Understanding Small Value ETFs

Now I'm looking for an ETF that will do the same for international small value.
Valuethinker
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Re: Who says a stock is either "value" or "growth"?

Post by Valuethinker »

richard wrote: Not all, probably not most, assets are carried at the lower of cost or market. As Valuethinker writes, some assets are held at depreciated (or amortised) cost, which may or may not bear any relation to market (or economic) value. Further, how to value many assets on a company's books is subject to a substantial amount of judgment.

Issues such as this are why I wrote above: "Book is the value of the companies assets as reflected on its accounting records. Given accounting rules, this means book does not necessarily reflect economic reality, which causes some to doubt the entire value stock story." Proponents say the key is price to anything - we're trying to determine how expensive a stock is, so the anything is less important.
Richard

Just to be a bit pedantic (but necessary)

book value = assets - liabilities ? Ie the book value per share is what I would call the Net Asset Value per share (Assets-Liabilities = Net Assets under UK GAAP).

So it is the net of a companies assets over liabilities. This is important because many companies trade at discounts to 1.0x Price to Book simply because they are highly indebted. The assets are very likely to fall into the hands of the creditors and the shareholders will get nothing.
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