As a dyed wool value investor, I believe that value will outperform growth or other strategies on a long term basis. There are various ways of valuing stocks using quantitive metrics. Bank of America Merrill Lynch has just published an extremely fascinating report, which evaluates the best performing value strategies of 2012.

First a brief summary of the conclusion of BAML, followed by some in-depth analysis and charts.

Low Price to Book saw a 17.1% return this year, but Low EV/EBITDA gained just 3.7%, and is among the worst strategies in the year to date. A sector bias may be causing the divergence, and Low Price to Book Value stocks may have been helped by a strong performance of the Financials sector (+16.1% YTD), which currently accounts for 62% of the factor’s weight. EV/EBITDA’s largest sector concentration is in Energy (34%), one of the weakest performing S&P 500 sectors this year (+2.5%).

According to one study we posted late last year, EV/EBITDA is the best valuation metric. The study states that EV/EBITDA has historically outperformed price over free cash flow, price over book, price over earnings, and other common metrics. However, as the report notes, the weighting of energy might have reduced the returns. Futhermore, no metric will ever outperform the market every year.

The fascinating part about the report is that although Wall Street mostly focuses on short term performance, we have some valuation metrics going back to 1989.

Let us look at the  following six strategies; forward earnings yield, earnings yield, price over book value, price over free cash flow, price over sales, EV/EBITDA.

First a look at how the the metrics are calculated. The index used is the S&P 500

  • Earnings Yield: Trailing 12-month EPS divided by month-end price.
  • Forward Earnings Yield: Rolling 12-month Forward EPS divided by month-end price.
  • Price/Book Value: Month-end price divided by the most recently reported book value per share.
  • Price/Free Cash Flow: Month-end price divided by most recently reported free cash flow. Free Cash flow is defined as earnings post extraordinary items, plus depreciation, and minus capital expenditures.
  • Price/Sales: Month-end market value divided by most recently reported sales.
  • EV/EBITDA: Enterprise Value (Equity Market Capitalization + Long Term Debt + Short Term Debt + Preferred Stock + Minority Interest – Cash & Cash Equivalents) divided by EBITDA (Reported Net Income + Special Items – Minority Interest + Interest Expense + Income Tax Expense + Depreciation and Amortization) – most recently reported.
Stocks with a high earnings yield have done relatively well. This is not surprising, since earnings yield is the opposite of the price earnings ratio. Below is a chart with the returns from 1986/89-2012
What is the Best Valuation Metric? 26 Years of Data Points to One
The 50 S&P 500 (INDEX.INX) stocks with the highest earnings yield are listed below (note: the ones listed throughout the article are not necessarily in any particular order).

Ford Motor Company (NYSE:F) 49%

Staples, Inc. (NASDAQ:SPLS) 12.18%

American International Group, Inc. (NYSE:AIG) 33.09%

Corning Incorporated (NYSE:GLW) 12.09%

Cliffs Natural Resources Inc (NYSE:CLF) 28.04%

Chevron Corporation (NYSE:CVX) 12.06%

Seagate Technology PLC (NASDAQ:STX) 20.99%

Bank of America Corp (NYSE:BAC) 12.02%

Metlife Inc (NYSE:MET)18.58%

Citigroup Inc. (NYSE:C) 11.95%

Assurant, Inc. (NYSE:AIZ)18.04%

AFLAC INC. DL -,10 (FRA:AFL) 11.89% 46.18

Chesapeake Energy Corporation (NYSE:CHK) 17.52%

Northrop Grumman Corporation (NYSE:NOC) 11.86%

New Phillips 66 (NYSE:PSX) 16.90%

Tesoro Corporation (NYSE:TSO) 11.85%

Dell Inc. (NASDAQ:DELL)16.05% 10.59

Safeway Inc. (NYSE:SWY) 11.76%

Western Digital Corp. (NASDAQ:WDC)16.00%

JPMorgan Chase & Co. (NYSE:JPM) 11.66%

Peabody Energy Corporation (NYSE:BTU) 15.67%

Teradyne, Inc. (NYSE:TER)11.65% 15.62

Apollo Group Inc (NASDAQ:APOL)15.53%

Gannett Co., Inc. (NYSE:GCI) 11.21% 15.26

Pitney Bowes Inc. (NYSE:PBI) 14.97% 13.36 16

Discover Financial Services (NYSE:DFS) 11.15%

Lexmark International Inc (NYSE:LXK)14.88%

The Allstate Corporation (NYSE:ALL) 11.13%

D.R. Horton, Inc. (NYSE:DHI) 14.80%


Marathon Petroleum Corp (NYSE:MPC) 13.64%

The Western Union Company (NYSE:WU) 11.07%

Aetna Inc. (NYSE:AET) 13.46%

DeVry Inc. (NYSE:DV) 10.93%

Newfield Exploration Co. (NYSE:NFX) 13.39%

Exxon Mobil Corporation (NYSE:XOM), 10.89%

Joy Global Inc. (NYSE:JOY)13.28% 53.38 3

Humana Inc. (NYSE:HUM) 10.89% 70.08

L-3 Communications Holdings, Inc. (NYSE:LLL) 13.04%

Interpublic Group of Companies, Inc. (NYSE:IPG) 10.81%

CF Industries Holdings, Inc. (NYSE:CF) 12.80%

Denbury Resources Inc. (NYSE:DNR) 10.78% 15.49

New Prudential Financial Inc (NYSE:PRU) 12.71% 54.51

Caterpillar Inc. (NYSE:CAT) 10.77%

Xerox Corporation (NYSE:XRX) 12.48%

Fifth Third Bancorp (NASDAQ:FITB) 10.63%

GameStop Corp. (NYSE:GME) 12.47%

KeyCorp (NYSE:KEY) 10.56%

WellPoint, Inc. (NYSE:WLP) 12.39%

New SLM Corp (NASDAQ:SLM) 10.54%

Forward earnings yield has outperformed the market, but less than the other strategies shown below. My guess would be that the underperformance relative to other value strategies, is due to inaccurate forecasts of future earnings.

Price to book strategy has been a disappointment. However, the reason for the poor performance is likely due to a disproportionate weighting in the financial sector.

What is the Best Valuation Metric? 26 Years of Data Points to One

Below are the top 50 stocks in the S&P 500 (INDEX.INX) which have the lowest price over book value.

Genworth Financial Inc (NYSE:GNW) 0.16

The Bank of New York Mellon Corporation (NYSE:BK) 0.78

Alpha Natural Resources, Inc. (NYSE:ANR) 0.26

Micron Technology, Inc. (NASDAQ:MU) 0.79

 The Hartford Financial Services Grup Inc (NYSE:HIG) 0.36

 People’s United Financial, Inc. (NASDAQ:PBCT) 0.79

Bank of America Corp (NYSE:BAC) 0.40

United States Steel Corporation (NYSE:X)0.79

Lincoln National Corporation (NYSE:LNC) 0.46

Xerox Corporation (NYSE:XRX) 0.80

Citigroup Inc. (NYSE:C) 0.47

New Cliffs Natural Resources Inc (NYSE:CLF) 0.81

E TRADE Financial Corporation (NASDAQ:ETFC) 0.48

Hudson City Bancorp, Inc. (NASDAQ:HCBK) 0.81

Morgan Stanley (NYSE:MS) 0.48

KeyCorp (NYSE:KEY) 0.81

First Solar, Inc. (NASDAQ:FSLR) 0.52

Loews Corporation (NYSE:L) 0.82 40.65

WPX Energy Inc (NYSE:WPX)0.56

WellPoint, Inc. (NYSE:WLP) 0.82

American International Group, Inc. (NYSE:AIG) 0.57

CME Group Inc (NASDAQ:CME) 0.84

Assurant, Inc. (NYSE:AIZ) 0.58

Corning Incorporated (NYSE:GLW) 0.84

Metlife Inc (NYSE:MET) 0.58

Comerica Incorporated (NYSE:CMA) 0.85 30.71


GameStop Corp. (NYSE:GME) 0.85

NRG Energy Inc (NYSE:NRG)0.65 21.34

Leucadia National Corp. (NYSE:LUK) 0.86

Unum Group (NYSE:UNM) 0.65

Principal Financial Group Inc (NYSE:PFG) 0.86

Alcoa Inc. (NYSE:AA) 0.67

Hess Corp. (NYSE:HES) 0.87

Prudential Financial Inc (NYSE:PRU) 0.67

Capital One Financial Corp. (NYSE:COF) 0.88

SunTrust Banks, Inc. (NYSE:STI) 0.67

Chesapeake Energy Corporation (NYSE:CHK) 0.89

Regions Financial Corporation (NYSE:RF) 0.68

DeVry Inc. (NYSE:DV) 0.92 19.31

XL Group plc (NYSE:XL) 0.72

 The Allstate Corporation (NYSE:ALL) 0.93

Goldman Sachs Group, Inc. (NYSE:GS) 0.75

ACE Limited (NYSE:ACE) 0.97 73.73

Nabors Industries Ltd. (NYSE:NBR) 0.75

PNC Financial Services (NYSE:PNC) 0.97 62.16

Zions Bancorporation (NASDAQ:ZION) 0.76

New Sealed Air Corp (NYSE:SEE) 0.97

JPMorgan Chase & Co.(NYSE:JPM) 0.77

Southwest Airlines Co. (NYSE:LUV) 0.97


New Tyson Foods, Inc. (NYSE:TSN) 0.97

Next comes Price over free cash flow, another popular metric. As shown below, the strategy seems to have done quite well.

50 stocks which meet the criteria of the lowest price over free cash flow:

Ford Motor Company (NYSE:F) 1.88

Tesoro Corporation (NYSE:TSO) 8.57

Netflix, Inc. (NASDAQ:NFLX) 2.46

KeyCorp (NYSE:KEY) 8.65

Pitney Bowes Inc. (NYSE:PBI) 3.35

Marathon Petroleum Corp (NYSE:MPC) 8.65

Seagate Technology PLC (NASDAQ:STX)4.51

Symantec Corporation (NASDAQ:SYMC) 8.72

Xerox Corporation (NYSE:XRX) 4.54

WellPoint, Inc. (NYSE:WLP) 8.77

Lexmark International

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