In the original research, the Value factor was quantified quite simply by Price to Book. A low price to book value implied higher value and a high price to book value implied lower value. Studies showed that firms with lower price to book values outperformed, over time, firms with higher price to book values.
Most people today quantity Value in a broader sense than simply price to book. The NSE 500 Value 50 index , which seeks to identify stocks with a strong ‘Value’ factor, used a composite of price to book, price to earnings, price to sales and dividend yield to rank stocks from the NSE 500 on value, and then to identify the 50 stocks with the most value.
The value factor has given tremendous returns over time, over broader equity indexes. However, since the last 5-7 years, value stocks have significantly underperformed, both in India and Internationally. For example, in the 5 years preceding this post, the NSE 500 Value 50 index has only returned 2.26%, when the NSE 500 itself (the benchmark from which these 50 stocks are drawn) has returned 11.36%.
The jury is out on whether the Value factor is still ‘valuable’. Some pundits swear by it, and say that it is just a matter of time before value comes roaring back. Some pundits argue that value still matters, except that the value of stocks now has many intangibles compared to the past, and the metrics given above don’t quantify this intangible value well. Hence the failure of value strategies. Then there are others who argue that stock markets now only value growth and quality, and ‘value’ stocks are usually ones which are not good quality stocks, and therefore, the value factor must be junked.
Personally, I am in the second camp, where I feel the Value is an enduring quality which predicts future expected returns in stocks. The value factor will make a comeback. However, perhaps we do need to tweak the value factor to account for the fact the traditional metrics don’t necessarily capture the value embedded in some new age businesses, and that we do need to consider things like brand value, number of active users and so on to correctly arrive at a value of new style businesses.