Explanation of our new Value Across Time Score

Value Investing By Time

In this short article we are going to go over what exactly is calculated in the new Value Across Time Score. The first thing that you need to know is that each part of the score is based on the rank of a variable within the last year.

This strategy, at its core, takes a look at each company within the universe and ranks it based on these factors basing it off of the performance of that company over the past year in each of these categories. This results in companies that, when compared with themselves and then again to the broader market, have a history of outperforming the rest of the market.
value_across_time.jun_28_02_19_01

  1. The Earnings Yield of the company over the past year must be in the top 50% of all companies
  2. Rank of Earning Yield in Respect to Enterprise Value over the past year must be in the top 50% of all companies
    1. Calculated by divided Total Revenue in the Trialing 12 months by Enterprise value we are able to calculate an earnings yield that looks at the bottom average rather than to top to avoid bias created by outliers.
  3. Rank of Free Cash Flow Yield over the past year must be in the top 50% of all companies
  4. The Rank of the Price-to-Book ratio over the past year must be in the top 50% of all companies
    1. Our Price-to-Book ratio is being calculated within this formula as (Total assets over the last quarter – (Total liabilities over the last quarter + Goodwill and intangibles over the last quarter))/Market cap.
  5. The Rank of the Expense ratio over the past year must be in the bottom 50% of the market
    1. This is the first ratio where we are looking for the bottom of the market. The reason this argument is looking for the lower end is because, proportionally, we want market cap to be far higher than total expenses.
  6. The Rank of PEG over the past year must be in the top 50%
    1. We are looking for overall growth in revenue here in respect to P/E. If the change in revenue over the past year is large the number will be closer to 1 when divided by P/E.
  7. The rank of Operating Cash Flow when Divided by Enterprise Value over the past year must be in the top 50%
  8. The rank of the debt-equity ratio over the past year must be in the bottom 50%
    1. Here we are attempting to find companies that have a much higher percentage of assets than they do liabilities. Therefore, the lower the number the better(as long as the number is positive)
  9. The rank of CROIC over the past year must be in the top 50% of the market.
  10. The rank of the company’s Piotroski Score over the past year must be in the top 50% of the market.

So we have a Score, Let’s Validate it!

The way we can go about validating scores like this is by implementing them into their own screener and seeing how trading solely off of the properties of this score would perform over the past twenty years.

Since this score is based off of a scale of 10, and throughout the score we look for companies that are ranked in the top 50% of the universe we are going to start off with an incredibly easy screen where we look for all companies that have a Value Across Time Score higher than 5.
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Here are our results; there are exactly 1058 companies that match this profile as of 6/28/16.
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These companies are evenly spread throughout; however, there is a small problem where over 50% of the companies found are small caps.
backtest.jun_28_02_43_37

Here we can see just how this simple strategy is able to beat the S&P 500 over the past twenty years averaging an almost 12% annual return.

 

What Happens when we Tighten the Restraints?

Since we are validating this formula we need to tighten the restraints a bit more to reflect how it would look when we actually use it in an investment strategy. Therefore, I’ve changed the editor to “Value Across Time Score >  8”
backtest.jun_28_03_38_54

We do even better – averaging over 15% annually without having to put anything else into the screener.

Now let’s look at the flip side. What happens if we make it so a company must have a score of less than 2.
backtest.jun_28_03_39_40

The results are absolutely horrible – proving that companies with a low score may be bad investments.

How about different rebalancing periods at a score set greater than 7?

  • Yearly

backtest.jun_28_02_47_37

  • Monthly Week 1

backtest.jun_28_02_48_41

  • Weekly

backtest.jun_28_02_50_16

  • Daily

backtest.jun_28_02_53_40

Overall:

Though we only explored a few sides of the validation process during this article, the primary reason for writing this was to explain exactly what the formula was and how it can help your next value based strategy succeed. We are currently working on a number of our own strategies that utilize this formula so keep on the lookout for new strategies coming to our featured screens category.

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