“Value Investing” is commonly misunderstood as buying companies at a discount to their intrinsic value. While that may have been true decades ago, today “Value Investing” predominantly consists of buying “low price to something” stocks. The “something” is a fundamental variable such as book value, earnings, and/or sales among others. However, such approaches do not necessarily identify undervalued stocks, only stocks that are “cheap” relative to the chosen fundamental variable.
An important, but unstudied issue for practitioners and academics to understand is:
• Do cheapness strategies independently generate excess returns? Or
• Are cheapness strategies simply correlated to intrinsic value, which generate excess returns?
Drawing from over 20 million real time valuations performed by Applied Finance since 1995, we explore this issue in depth.