Definition
Value Factor
The value factor is the tendency, documented in long-run data, for relatively cheap stocks, measured by ratios like price-to-earnings or price-to-book, to outperform expensive ones over time.
Indian value strategies screen for low P/E, low P/B, high dividend yield or high earnings yield, captured in indices such as the Nifty500 Value 50. The premise is that the market over-extrapolates bad news, leaving cheap stocks priced for excessive pessimism.
Value is notoriously streaky; it can underperform growth for years, as it did through much of the late 2010s globally, before rebounding sharply. This long cyclicality is why value is usually combined with other factors in a multi-factor model rather than relied on alone.
Related terms
- Factor InvestingFactor investing is the systematic targeting of securities with specific measurable characteristics, called factors, that academic research has linked to higher long-run risk-adjusted returns.
- Multi-Factor ModelA multi-factor model combines several return factors, such as value, momentum, quality and low volatility, into a single framework to score and weight securities, diversifying across drivers of return.
- Momentum FactorThe momentum factor captures the tendency for stocks that have performed well recently to keep outperforming in the near term, and recent losers to keep lagging, over horizons of roughly three to twelve months.
- Quality FactorThe quality factor targets companies with strong fundamentals, such as high and stable return on equity, low debt, and consistent earnings, on the basis that high-quality firms tend to outperform on a risk-adjusted basis.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.