The October edition of the Academic Research Digest by Citi Global Quantitative Research contains an overview of four academic research papers. One of these, “On the Performance of Cyclically Adjusted Valuation Measures,” dated September 30, 2013, is a  study by Wesley R. Gray, Drexel University, LeBow College of Business; Empiritrage, LLC, and Jack Vogel, Drexel University that compares different cyclically adjusted valuation measures.

Objective of the study

Are cyclically-adjusted valuation metrics effective in identifying high performing stocks? How does the increasingly popular CAPE Ratio, which evaluates inflation-adjusted earnings across a 10-year span, stack up against other cyclically adjusted valuation ratios?

The study attempts to compare the following using data from July 1, 1973 through December 31, 2012:

  • 10-year average real earnings to market capitalization (CA-EM)/CAPE
  • 10-year average real book values to market capitalization (CA-BM)
  • 10-year average real earnings before interest and taxes and depreciation and amortization to total enterprise value (CA-EBITDA/TEV)
  • 10-year average real free cash flow to total enterprise value (CA-FCF/TEV)
  • 10-year average real free gross profits to total enterprise value (CA-GP/TEV)

All variables are inflation adjusted using the CPI. Data is sourced from CRSP for the NYSE/AMEX/NASDAQ exchanges.


The CABM valuation measure is superior to all others; monthly rebalancing boosts portfolio returns and that the application of momentum to cyclically-adjusted valuation metrics improves returns.

CA-BM value-of-$100-invested

“The broader take away from our study is that any portfolio strategy focused on purchasing cheap stocks based on cyclically-adjusted valuation measures has historically outperformed a strategy that purchases expensive stocks and a strategy the simply buys and holds the market portfolio.”

Comparing the CABM metric with CAPE



In each of the above tables Panel B (CABM) is compared with Panel A (CAPE) and the highlighted figures show that CABM is superior to CAPE. (Panels of the other metrics have not been reproduced here)

The authors are therefore of the opinion that the Shiller P/E, or cyclically-adjusted price-to-earnings (CAPE) ratio, is not the optimal way to implement a cyclically-adjusted value measure. The CABM gives far better performance as seen above.