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Value Investing

Identifying stocks with prices which seem to understate their intrinsic value.

Buying companies that are cheaply priced seems an intuitively straightforward path to investment success. History supports the argument. Taking the right 'value' approach is important.

Concept of Value

  • Benjamin Graham, the father of Value investing, believed undervalued companies have the capability to perform well in the long run. He believed that you should always invest with a ‘margin of safety’.
  • ‘Margin of safety’ is the principle of buying a security at a significant discount to its intrinsic value.
  • The ‘margin of safety’ concept is deeply embedded in Benjamin Graham’s Value investing philosophy.
  • Value investing, as Graham advocated, is not concerned with short term trends in the market or daily movements of stocks.

Authors Summary
Benjamin Graham and David Dodd
  • Margin of safety
  • P/E and PB ratios
Fama & French
  • Return of Value stocks explained by higher fundamental risk
  • Identified Value premium in international equities
Cochrane & Zhang
  • Limited flexibility of value firms to adjust to economic regime
Hansen, Heaton & Li
  • Value premium is compensation for GDP sensitivity
Loughran & Wellman
  • Enterprise multiple as a proxy for firm’s discount rate
Lakonishok, Shleifer & Vishny
  • Behaviour fallacies in Value strategies
Barberis & Huang
  • Investors have loss aversion

Graham's Value books

Investing in Value: Combining successful value approaches and academic research

The observation that cheaply priced stocks outperform pricier stocks in the long term is the foundation of value investing. Since the time of Graham, value investing has been finessed and different value investors employ different ways to calculate value.

MSCI, one of the world’s largest index providers, analyses all of the companies in its universe and creates its Enhanced Value Indices. Compared to a traditional value approach, MSCI’s enhanced value indices overcome many of the criticisms of value, such as ‘value traps’, because it puts less weight on price-to-book as a metric and moves away from backward-looking dividend yield altogether. It uses a whole-firm valuation measure in enterprise value which could reduce concentration in leveraged companies.

MSCI’s Enhanced Value is based on the basis of three key Value factors:

Identifiable metric:

Price to book (P/B)

Ratio of the price to the company’s book value or what is on the balance sheet. The lower the price to book, the cheaper the company

Identifiable metric:

Forward Price-to-earnings (Forward P/E)

A version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation. The forward earnings are the weighted average of the consensus of analysts’ predicted earnings. The lower the Forward P/E the cheaper the company.

Identifiable metric:

Enterprise Value/Operating Cash Flows (EV/CFO)

The ratio of the entire economic value of a company to the cash it produces. When you divide EV by CFO, you're essentially calculating the number of years it would take to buy the entire business if you were able to use all the company's operating cash flow to buy all the outstanding stock and pay off all the outstanding debt. The lower the ratio faster a company can pay back the cost of its acquisition or generate cash to reinvest in its business.

Accessing MSCI's Enhanced Value approach

 

Diversified across countries, sectors and companies

Offering investors a portfolio of approximately 250 companies across a range of geographies, sectors and economies

Long term focus, capturing Value across the market cycle

VLUE tracks a MSCI Index that aims to address the pitfalls of Value investing, among them “value traps” – stocks that appear cheap but which in fact do not appreciate. The index is designed to capture a high level of exposure to Value while minimising unintended and unwanted sector bets.

International companies exhibiting value characteristics

Access a portfolio of international companies that are selected for their high Value score relative to sector peers as measured by: (i) price to book value; (ii) price to forward earnings; and (iii) enterprise value to cash flow from operations.

VanEck MSCI International Value ETF

VLUE

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Other approaches to Value:

Morningstar’s approach

Morningstar’s forward-looking valuation approach allows long-term investors to look beyond a company’s current price and potential noise in the market. Each company is assigned a current fair value based on projected future cash flows, which is assessed against its current price.

 

Morningstar’s Fair Value Estimate

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For more information on Morningstar’s value approach visit the dedicated Moat investing page

Accessing Morningstar’s valuation methodology to identify Wide Moat companies trading at an attractive price/fair value ratio.

us wide moats

MOAT

VanEck Morningstar
Wide Moats ETF

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global wide moats

GOAT

VanEck Morningstar
International Wide Moat ETF

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Key risks: Investments in ETFs carry risks associated with financial markets generally, individual company management, industry sectors, fund operations and tracking an index. See the PDS and TMD for more details on risks and whether these products are appropriate for you. Investment returns and capital are not guaranteed.