What Is Value Investing?

Value investing is an investment philosophy that consists of buying stocks that are trading for less than their intrinsic value.

This simple yet effective investment approach became famous thanks to the incredible performance achieved by its proponents, like Warren Buffett, Charlie Munger, or Seth Klarman, to name a few.

For example, Seth Klarman's hedge fund generated a compounded annual return of 20% from its inception to 2008, beating the market to a large extent. (Source)

Value Vs. Growth Stocks - Is Value Investing Dead?

Whenever you are dealing with portfolio construction or investment strategy, you have to face the ever-present dilemma: what's better between value and growth stocks?

Before we answer the million-dollar question, let's review what the difference between the two is.

Value stocks are stocks that are cheap relative to their fundamentals and have lower valuation ratios than the market. The most used valuation ratio for categorizing value stocks is the price-to-book ratio. Indeed, the Russel 1000 Value Index is composed of companies with lower price/book ratios.

Growth stocks are stocks with higher forecasted and historical growth rates. For this reason, they are much more expensive than the market.

In the past century, value stocks usually outperformed the market.

According to James O. Shaughnessy's research, in the 82-years backtest period between 1927 and 2009, stocks with the lower P/B ratio generated an 11.33% CAGR compared to 10.46% of the market. At the same time, stocks with the highest PB ratio generated an 8.10% CAGR, underperforming the market.

However, in the past 10 years, value stocks drastically underperform growth stocks. From April 14, 2010, to April 14, 2020, the Russel 1000 Growth Index returned 218%, while the Value Index generated just a 74% CAGR.

This long period of underperformance has led many investors to believe value investing is not effective anymore. However, there is nothing strange at all in that.

Indeed, despite beating the market in the long run, picking stocks with a low P/B ratio results in long periods of underperformance in the past too. In the backtest I mentioned above, value stocks beat the market 77% of the time on rolling 10-year periods.

BlackRock's research about the value premium confirms the result. The value premium represents high book to market stocks minus low book to market stocks performance (also referred to by many investors as value minus growth).

A positive value premium means that value stocks outperformed growth stocks over a given period. The research shows the percentage of positive value premium over various periods between 1926 and 2009:

The results tell us that value stocks tend to outperform growth stocks in the long run, but that it is completely normal for them to underperform over some periods.

What's more, when that happens it is most likely because growth stocks become more expensive than ever. Indeed, that's exactly what happened in the past 10 years. Growth stocks' strong performance was mainly driven by multiples expansion, rather than fundamentals, as it was with the dot-com bubble.

However, a Bloomberg research shows that every time that the valuation of the growth index is relatively high compared to its value peer, the first one subsequently underperforms. As you can see in the following graph, a wide gap in the pe ratio between value and growth stocks is generally followed by the growth index's underperformance:

Conclusion

While it is true that value stocks underperformed the market in the past decade, I would like to point out that value investing is not about picking low PB ratio stocks. Value investing is about finding value, and there are so many companies with a low PB ratio and zero value, as there are a lot of companies with a high PB ratio and tremendous value. We should always keep in mind that investing is much more than a simple ratio!

As Charlie Munger says:

All intelligent investments are value investments.

Do you know what the most successful companies in the world, such as Amazon, Facebook, Netflix, and Tesla have in common? They are founder-led companies (i.e., companies where the founder is also the CEO.)

Indeed, one of the often underrated factors in stocks analysis are the people who run the business. Behind any great business, there is a great management that can make the difference between a successful and a failing company.

In this article, we will show you some data, statistics, and research that demonstrate how founder-led companies tend to perform better than the others!

Founder-Led Companies: What Data Say

The first study of the subject is by professors at Purdue's Krannert School of Management, who analyze the correlation between founder CEOs and innovation for S&P 500 firms from 1993 to 2003.

They found that founder CEO-managed firms are more effective and innovators than professional CEO-managed ones since they generated 23% more patents (after controlling for R&D spending).

What's more, the founder CEOs' innovations also bring more financial value to the company.

Another insightful study comes from Bain & Company. They analyzed the stocks of S&P500 founder-led companies and found out that its performance was 3.1 times better than the others between 1990 and 2014.

Besides founder-led companies, they also considered those running the business according to principles and practices designed by the founder, or those where he was in the Board of Directors.

Why does that happen?

As you can see, there's a multitude of data confirming that founder-led companies tend to outperform the rest, so you might wonder why that happens.

One of the main reasons could be that it is really unlikely that a professional CEO can have the same vision as the founder. That isn't always true, but in most cases, the founder of these incredible companies that changed the world are visionary individuals with a strong vision of the future. Thus, they are more likely to make the best decisions for the long-term success of the company.

The second reason is more deep-felt and concerns the relationship between a founder and his company. As Fidelity points out in his article, a founder sees his company as his life's project and has a greater motivation to act for its long-term prosperity.

How can you spot founder-led companies?

If you want to invest in a diversified portfolio of founder-led companies, you can opt for the Global X Founder-Run Companies ETF.

It is an exchange-traded fund launched and managed by Global X Management Company LLC that invests in us founder-led companies across diversified market capitalization and operating across diversified sectors. It seeks to track the performance of the Solactive U.S. Founder-Run Companies Index, by using full replication technique.

If you just want to take a look at the list of founder-led companies, you can find it here.

For investors (and indeed for everyone else) 2020 has been a year where a crisis seems to be followed by yet an even bigger crisis. It started with growing political tensions threatening global trade, then came a global pandemic and an oil price crash which in turn led to one of the worst economic crises in history. And once it looked like things were slowly recovering, mass civil unrest ensued and we have just made it only halfway through the year.

Yet, despite all of this, the market so far has managed to remain surprisingly resilient, edging into a downturn but not it to a complete catastrophe like the one seen during the Great Depression. However, another impending crisis could well make it so, if not far worse. The number of ‘zombie’ companies is growing rapidly and if the situation does not improve, we could likely head towards a financial apocalypse.

What is a zombie company?

A zombie describes a being that should be technically dead yet is alive somehow. A zombie company is similar – one that is heavily in debt but earns just enough to continue operating and service its debt (but not pay it off). As one would expect, such companies, just barely managing to scarp by, are highly vulnerable to market disruptions. A small rise in interest rates, a decline in consumer spending, or a single poor quarterly performance could risk it becoming insolvent.

In a completely efficient market, zombie businesses wouldn’t exist, instead, being quickly replaced by more productive competitors. In real life, however, they remain animated by cheap credit, the access to which reduces pressure for these companies to invest in innovation and efficiency as well as shift the need for hard decisions well into the hazy future.

Often of massive size and thus, politically too costly for the government to be allowed to go insolvent, these uncompetitive corporate giants continue to lumber onward from repeated bailouts or generous bank loans. While this avoids a negative economic outcome in the short-term, in the long term, this leads to the crowding out of productive investment and the entry of newer, more innovative companies. This, in turn, can potentially lead to a steady decline in growth and eventually chronic stagnation as happened in the case of Japan.

What You as an Investor Should Be Worried?

Since the 2008 financial crisis, the number of zombie companies had more than doubled by 2017 accounting for [roughly 16%](https://www.marketwatch.com/story/stock-market-investors-should-beware-the-growing-number-of-zombie-companies-2017-11-29" target="_blank) of the components of the Russell 3000. The current economic crisis likely may have led to an even larger increase in the number of zombies. However, slower future expansion as a result of misallocation of capital into these companies isn’t the only aspect to worry on.

Because of their size, zombies can be contagious. If one fails, it can result in a panic and mass selloff of other zombie stocks, resulting in a chain reaction of more and more zombie companies going under, especially if banks, in response to the resulting chaos, starting raising their interest rates. As an increasing number of these companies default, banks and credit agencies who lent to them also suffer and risk illiquidity.

The resulting down spiral can significantly lower investor confidence and thus, even stocks of otherwise healthy companies decline as well.

Given the present uncertainties in the market today and the market rally following the first crash had since plummeted to levels seen in 2002 and 2008, it indicates another crash to be likely this summer. The longer the recession holds, the more likely it is for zombie companies to become insolvent and worsen the crisis further.

Moody’s analysts predict that the corporate default rate globally [could climb to 6.8%](https://m.moodys.com/newsandevents/topics/Recession-Risks-007052?cid=J03R5OX7WFJ4527" target="_blank), more than double the default rate witnessed in February 2020. Without the right intervention, such a scenario can potentially spiral into a prolonged period of economic contraction.

The Upside

While still vulnerable, markets today are far less affected by emotions than earlier times. Investment decisions today are made with smarter insights and the majority of trades today are managed by advanced A.I algorithms, invulnerable to irrational biases.

While this on-going recession is likely to become worse before a real recovery starts, the contagious effect of zombie companies may potentially not be as severe as we may expect. If anything, the current crisis reflects an opportunity for market corrections and pruning of inefficiencies, leading to a healthier and more resilient future economic landscape.

While increasing regulations on financials have made investment far safer and less volatile, it has also made seeking alpha far more difficult. To earn higher returns on their money, investors are increasingly looking towards hedge funds as the ideal option. However, while hedge funds do provide a viable opportunity to trounce the market, not all of them are equal. Have your money managed by the wrong agency and, rather than beat the market, see your returns falter.

One hedge fund agency, however, has built itself a strong reputation for providing among the best and most consistent returns on their managed portfolios – Renaissance Technologies LLC.

What is Renaissance Technologies LLC?

Regarded as one of the most secretive and successful hedge funds in the world, Renaissance Technologies LLC was co-founded back in 1982 by the famed Mathematician, former Cold War code-breaker and multi-billionaire James Simon along with investor Howard lee Morgan. The firm is based in East Setauket, Long Island, New York.

The company is currently headed by Peter Brown, a former IBM Research’s computer scientist who joined Renaissance back in 1993. Simon continues to remain engaged with the firm, serving as a non-executive chairman and remaining invested in its holdings.

The firm is also distinct for hiring many of its employees from completely non-financial backgrounds, including scientists, statisticians, and mathematicians. It is because of this coupled with its astounding success that the firm has been termed “the best physics and mathematics department of the world.”

Renaissance Technologies Returns And Strategies

In terms of returns, Renaissance Technologies LLC boasts one of the best, if not THE best, track records in all of Wall Street, with their flagship Medallion fund providing a staggering return of more than [66 percent annualized](https://en.wikipedia.org/wiki/Renaissance_Technologies" target="_blank) before fees (39 percent after fees) over a 30-year time span from 1988 to 2018. In 2008, while the S&P 500 index fell from grace with a crash of 38.5 percent, the Medallion reaped in a record-breaking 98.2 percent gain. Since its inception, the closely guarded fund has managed to earn over $100 billion in profits.

Chief among the Renaissance Technologies LLC strategies is the use of highly complicated quantitative trading models such as an expanded version of the Baum–Welch formula to find market correlations through which opportunities for profit can be identified and invested in.

Using these equations, the firm crunches through petabytes (1015 bytes) of market data to assess market probabilities and price trends. The firm has been a trend-setter of this strategy, extracting market insights from vast quantities of data for almost two decades until the present. This is well before concepts such as big data and data analytics even became mainstream in the business world.

Renaissance Technologies Products

As already mentioned, its flagship Medallion fund is arguably one of the best performing managed funds on the market. However, it hasn’t been available to outsiders since 1993, instead of being run mostly for the firm’s employees or their families.
For outsider investors, the firm offers three managed portfolios. Combined they totaled approximately $55 billion in asset value.

•Renaissance Institutional Equities Fund (RIEF)

•Renaissance Institutional Diversified Alpha (RIDA)

•Renaissance Institutional Diversified Global Equity (RIDGE)

Historically, these funds have largely trailed the performance of the more famous Medallion fund.

Renaissance Technologies Holdings

As of current, Renaissance Technologies’ holdings have mainly been in the Healthcare, Consumer Staples, and IT Sectors. The firm’s largest holding is Bristol-Myers Squibb Co (NYSE: BMY), of which it owns around 2.9168% of the shares. Another company in which it owns a major share is Denmark based Novo-Nordisk A/S ADS (NYSE: NVO), of which it owns 1.188% of the shares. Among their largest new investment in for Q1 2020 in terms of the total volume of shares was in Sirius XM Holdings Inc (NASDAQ: SIRI) at 23,243,102 shares. The company it sold away the most shares of was General Electric Co (NYSE: GE) at a total volume of 33,092,729 shares.

If you want to learn more about how Jim Simons made Renaissance Technologies one of the best hedge funds in the world, we suggest reading a great book from Gregory Zuckerman: [The Man Who Solved The Market](https://amzn.to/2BoQQte" target="_blank).

Bonus: 3 Quantitative Investment Strategies You Can Use Right Now

With rising uncertainties within the global economy, new investors may find it difficult to imagine that opportunities still exist to gain high returns with little risk. Access now for free to our guide that teaches you [3 quantitative investment strategies](https://finbox.com/blog/3-investment-strategies-to-beat-the-market/" target="_blank) that will allow you to beat the market this year.

Keep Reading

If you find this article interesting, and you want to become better at investing, we suggest reading the following articles:

1. [7 Investment Tools That Will Boost Your Investment Returns](https://finbox.com/blog/investment-tools-that-will-improve-your-investment-returns/" target="_blank)
2. [Balance Sheet Analysis: 10 Ratios You Should Use](https://finbox.com/blog/balance-sheet-analysis-10-ratios-you-should-use/" target="_blank)
3. [What Is A Good PE Ratio For Stocks?](https://finbox.com/blog/what-is-a-good-pe-ratio-for-stocks/" target="_blank)

Recently, Finbox users have been asking us to add a metric called the Beneish M-Score to help them quickly identify companies that are likely manipulating their earnings reports. So I decided to investigate this financial ratio and its statistical foundation. I then translated the concepts described in the paper into a spreadsheet financial model.

Note there is a lot of misinformation on this topic around the web and in some of the top search results on Google. To be sure, I reconciled all the calculations I use in the post with the Beneish M-Score calculation posted by Dr. Beneish and the Sunbeam example provided.

You can view and download the model for free using the links below. Note the "Linked" tab will allow you to calculate this score with the latest data for any company using the Finbox Spreadsheet Add-on. You just need to have the Finbox Excel or Google Spreadsheets add-on installed correctly.

[ View Spreadsheet Calculator ]: To make a copy of the Google Spreadsheet, go to File > Make a Copy

[ Download Excel Spreadsheet Calculator ]

What Is The Beneish M-Score

I was happy to find that professor Messod D. Beneish at my Alma mater, Indiana University, Kelley School of Business, invented the score. In his now famous paper, Dr. Beneish sets out ambitiously to "profile a sample of earnings manipulators" and identify the characteristics that distinguish them from their public peers. He then develops and outlines a statistical model to detect such manipulation by proposing eight key variables designed to "capture either the effects of manipulation or preconditions that may prompt firms to engage in such activity."

It's important to note, just because a company has been flagged by the model as an earnings manipulator does not necessarily mean that it's true. Like any statistical model, the Beneish M-Score is subject to false positives. The inverse is also true — the model does not identify all earnings manipulators. In Dr. Beneish's holdout sample tests, the model identified approximately half of the companies involved in earnings manipulation before the public market realized. Considering the catastrophic consequences of owning stock in a company that's involved in accounting trickery can have on a portfolio, the model's hit rate is very impressive. After all, some bright Cornell students used the Beneish M-Score to identify Enron Corporation as an earnings manipulator correctly.

Beneish M Score Formula, Methodology & Calculation Details

So let's get into the methodology and calculation steps. The paper outlines eight financial ratios required to calculate the score:

1. Days Sales in Receivables Index (DSRI): DSRI is the ratio of days sales in receivables in the first year in which earnings manipulation is uncovered (year t) to the corresponding measure in year t-1. This variable gauges whether receivables and revenues are in or out-of-balance in two consecutive years. Dr. Beneish explains, "I thus expect a large increase in days sales in receivables to be associated with a higher likelihood that revenues and earnings are overstated."
   
   

   DSRI = (Net Receivables_t / Sales_t) / (Net Receivables_t-1 / Sales_t-1)

2. Gross Margin Index (GMI): GMI is the ratio of the gross margin in year t-1 to the gross margin in year t. It appears Dr. Beneish is building on the work of Lev and Thiagarajan (1993) here that suggested gross margin deterioration is a negative signal about firms' prospects.
   
   

   GMI = [(Sales_t-1 - COGS_t-1) / Sales_t-1] / [(Sales_t - COGS_t) / Sales_t]

3. Asset Quality Index (AQI): Asset quality in a given year is the ratio of non-current assets other than property plant and equipment (PPE) to total assets and measures the proportion of total assets for which future benefits are potentially less certain.
   
   

   AQI = [(Total Assets - Current Assets_t - PP&E_t) / Total Assets_t] / [(Total Assets - Current Assets_t-1 - PP&E_t-1) / Total Assets_t-1]

4. Sales Growth Index (SGI): SGI is the ratio of sales in year t to sales in year t-1. I was surprised to find this variable included since investors typically love growth. Dr. Beneish notes, that while growth does not imply manipulation, management at growth companies are more likely to face investor pressure to achieve earnings targets.
   
   

   SGI = Sales_t / Sales_t-1

5. Depreciation Index (DEPI): DEPI is the ratio of the rate of depreciation in year t-1 vs. the corresponding rate in year t. When DEPI is greater than 1, it indicates that the rate at which assets are depreciated has slowed down. This can signal that aggressive accountants may be revising estimates of assets useful lives upwards or adopting a new depreciation method to reduce expenses.
   
   

   DEPI = (Depreciation_t-1/ (PP&E_t-1 + Depreciation_t-1)) / (Depreciation_t / (PP&E_t + Depreciation_t))

6. Sales General and Administrative Expenses Index (SGAI): SGAI is calculated as the ratio of SGA to sales in year t relative to the corresponding measure in year t-1. Dr. Beneish again builds on the work of Lev and Thiagarajan (1993) here, assigning a positive relationship between increasing profit margins and the probability of manipulation.
   
   

   SGAI = (SG&A Expense_t / Sales_t) / (SG&A Expense_t-1 / Sales_t-1)

7. Leverage Index (LVGI): LVGI is the ratio of total debt to total assets in year t relative to the corresponding ratio in year t-1. An LVGI greater than 1 indicates an increase in leverage. By including this variable, the model captures incentives for earnings manipulation to meet debt covenants.
   
   

   LVGI = [(Current Liabilities_t + Total Long Term Debt_t) / Total Assets_t] / [(Current Liabilities_t-1 + Total Long Term Debt_t-1) / Total Assets_t-1]

8. Total Accruals to Total Assets (TATA): Finally, Dr. Beneish total accruals to total assets as a proxy for cash earnings underlying the reported earnings. Higher positive accruals (less cash) can logically be associated with a higher likelihood of earnings manipulation.
   
   

   TATA = (Income from Continuing Operations_t - Cash Flows from Operations_t) / Total Assets_t

The Beneish M-Score

After computing the eight variables outlined above, they can be weighted together using the following multivariate model to calculate the score:

M-Score = 
-4.84 
(+) 0.92 × DSRI 
(+) 0.528 × GMI 
(+) 0.404 × AQI 
(+) 0.892 × SGI 
(+) 0.115 × DEPI 
(+) -0.172 × SGAI 
(+) 4.679 × TATA 
(+) -0.327 × LVGI

Here are the summary stats from the paper:

When an M-Score is greater than -1.78 (e.g -1.1), the model flags the company as a likely earnings manipulator. If of interest, you can also use the score to determine the probability of manipulation using this free calculator. Just enter the value of the Beneish M-Score in the "Calculate probability Q from z" section.

So in summary:

• When the Beneish M-Score is greater than -1.78, the company is likely an earnings manipulator
• When the Beneish M-Score is between -1.78 and -2.00, the company is a possible earnings manipulator
• When the Beneish M-Score is less than -2, the company is not likely an earnings manipulator

Beneish M-Score Stock Screener

We've done the heavy lifting of calculating the Beneish M-Score score for every company and keep an updated dataset. You can look up the score for any company using the Data Explorer tool: See Apple's Score

To find stocks that are flagged by the Beneish M-Score, you can use the Finbox Stock Screener tool. Add it as a filter in the screener, and you'll get the latest candidates.

Every time I hold a Q&A webinar, one of the questions I get the most is: What is a good pe ratio for stocks? Indeed, figuring out what a good pe ratio is could be challenging.

If you read the books and the deeds of the best investors in the world, such as Warren Buffet, you will find that to get great returns, you have to invest in value stocks with a low pe ratio. But when you check the pe ratio of the most famous companies in the world, such as Amazon, Apple, or Facebook, you find that most of them have a high pe ratio.

I know, that can be confusing. But don't worry! In this article, you will find all the statistics and data you need to finally understand what a good pe ratio for stocks is.

What data say about the PE ratio

As you probably already realized from my last article [3 investment strategies to beat the market in 2020](https://finbox.com/blog/3-investment-strategies-to-beat-the-market/" target="_blank), I'm a very data-driven investor. I believe that the only way to achieve high returns consistently is by setting aside our emotions, our beliefs, and our preconceptions and base our decisions exclusively on data.

And that is even more significant when it comes to valuation ratios. A new company with disruptive technology and amazing products could easily lead investors to pay any price regardless of the real value of the business.

For this reason, it is extremely important to never forget what data say about valuation ratios. Let's see what is a good pe ratio for stocks according to data.

Have you already read What [Works On Wall Street](https://amzn.to/3cgEVe1" target="_blank)? In this book, James O'Shaughnessy backtests several investing strategies and shows you the ones that beat the market. Investing in stocks with a low pe ratio was one of them.

He divides the US stock market into 10 deciles according to the pe ratio of stocks. Stocks in the lowest decile (those with the lowest pe ratio) outperformed the market to a large extent, while those in the highest decile (those with a high pe ratio) drastically underperformed it.

By investing in the group of stocks with the lowest pe ratio between January 1, 1964, and December 31, 2009, you would have obtained a 16.25% CAGR, against the 11.22% of the market. $10,000 would have become $10,202,345, while the same amount would have been "just" $1,329,513 by investing in the whole market. At the same time, $10,000 would have been no more than $118,820 if you had invested it in the high pe ratio stocks group!

Source: Author's graph based on J. O'Shaughnessy's research

What is a good PE Ratio?

After seeing that low pe ratio stocks generally outperform the market, you're probably wondering what the exact value of a good pe ratio for stocks is. Well, it all depends on different factors, such as its growth, its economic moat, and, most important, the sector the company operates in.

That is probably the most important factor to take into consideration while evaluating if a company has a good pe ratio. Indeed, there are some sectors, such as banking, which have a low pe ratio because of the risks priced in the valuation.

For this reason, you should never make the mistake of considering one stock better than another just because it has a lower pe ratio if the two operate in different sectors.

Generally, a good pe ratio is one that is lower than the sector average. The best stocks you can find are those that have a low pe ratio compare to the sector average but at the same time have good growth and an economic moat.

You can easily check that with the [Finbox Data Explorer](https://finbox.com/NASDAQGS:AAPL/explorer" target="_blank). Just search for the metric you want (in this case, the pe ratio) and scroll down to sector benchmark analysis where you can find the sector average and other insightful data. For example, you can check in which decile is your stock. If it is in the highest one (over the 90% percentile), there is a high chance that the stock is overvalued!

Should you buy just the stocks with the lowest pe ratio?

After reading that low pe ratio stocks generally outperform the market, you may be tempted to open the [Finbox Stock Screener](https://finbox.com/screener" target="_blank) and start buying the stocks with the lowest pe ratio. However, that would be a mistake.

As I mentioned before, if you start buying just the stocks with a low pe ratio, you may end up with a portfolio entirely composed of a few sectors. That would expose you to a considerable risk in case one of those sectors should face a crisis.

That is exactly what would have happened if you were bought the stocks with the lowest pe ratio before the great financial crisis. You would have ended up with overweighting the banking sector, and you would have faced a severe drawdown.

For example, if you selected low pe ratio stocks right now, you would buy just stocks in the energy sector. Keep always in mind that one of the golden rules of portfolio management is the diversification among sectors.

You can get up to date stats and graphs like that directly in Excel with the [Finbox Excel Add-In](https://finbox.com/integrations/excel" target="_blank).

Conclusion (+ bonus)

In this article, you've learned that stocks with a low pe ratio generally outperform the market and that the best stocks you can find are those with a low pe ratio compare to the sector average, but that at the same time have good growth prospect and an economic moat.

You've also learned that you shouldn't rely just on the pe ratio for finding stocks, because that could expose you to unnecessary risks.

Bonus: Do you know that there are better strategies to beat the market without facing more risks? I teach you 3 investment strategies in [this article](https://finbox.com/blog/3-investment-strategies-to-beat-the-market/" target="_blank) that you can access for free.

Every novice investor may find it challenging to choose among dozens of different investment strategies. There are loads of information online and it can be difficult to distinguish those that are useful from those that are not.

But don't worry, in this article, you'll find three investment strategies that will help you beat the market without taking unnecessary risks.

#1 Investment Strategy: Momentum Stocks

Let me guess. Even if you are relatively new to the investment world, you have already heard the trend is your friend motto dozens of times, haven't you? Indeed, it is very popular.

The reason is pretty simple: stocks that have gone up in the past few months, are more likely to continue their strong performance in the near future. That happens because of irrational market behavior: confirmation bias, fear of missing out, greed. Times change, governments change, business changes, but human behavior doesn't.

Indeed, we have data back to 1926 confirming this.

Have you already heard of [What Works On Wall Street](https://amzn.to/3cgEVe1" target="_blank)? It's a book from James O'Shaughnessy in which the author backtested dozens of investing strategies and shows you the ones that work on the stock market. Momentum was one of them.

In his researches, he starts from the whole U.S. stock market and divides the stocks into 10 deciles based on their 6-month momentum. Stocks in the lowest decile (those with the lowest momentum) performed much worse than those in the highest decile (those with the highest momentum.)

In the 83-years backtest period between 1926 and 2009, stocks with the best 6-month momentum generated a 14.11% CAGR, turning $10,000 into $572,831,563.

By investing the same amount in the whole market you would have got "just" $38,542,780, generating a 10.46% CAGR. Yes, you read that correctly: momentum would have made you 14,86 times the market return.

In case you are wondering how to pick the best momentum stocks, I've prepared a dedicated stock screener for this that you can find [here](https://finbox.com/screener/s-802ibdpm" target="_blank). Just click on the link and select the first 30 stocks in the screener.

In case a 14.11% seemed like a lot, I suggest you keep reading because you're gonna find out two other investing strategies that will get you far more than that.

#2 Investment Strategy: The Acquirer's Multiple

If this is the first time you read of the acquirer's multiple, you have probably missed the chance to achieve extraordinary performance in the stock market.

Indeed, In the 44-years backtest period between 1973 and 2017, the acquirer's multiple generated a 17.9% CAGR, turning $10,000 into $14,9 Million. If you had invested in the whole market you would have got just $741,737 over the same period.
Yes, you would have got 20 times the market return.

In case you are wondering, the strategy has a better risk-adjusted return too. Its Sharpe ratio of 0.61 almost doubles the 0.33 of the market.

This investment strategy was designed by Tobias Carlisle and consists of select the first thirty stocks with the lowest EV/EBIT multiple and a market cap greater than $1 Billion.

You can pick those stocks by using this [stock screener](https://finbox.com/screener/s-1yl93pef" target="_blank). Just click on the link and select the first 30 stocks in the screener.

If you want to dig deeper into this investing strategy, we have a dedicated guide where you can find everything you need to know about that:

[The Acquirer's Multiple: Review, Performance, and Backtest.](https://finbox.com/blog/what-is-the-acquirers-multiple-review-performance-backtest/" target="_blank)

As you can see, you can easily beat the market focusing on value or momentum. The next investment strategy combines the two to get even better investment returns (more than 20% per year). Are you ready? Let's dig deeper!

#3 Investment Strategy: Trending Value

As the name suggests, this strategy consists of combining the trend is your friend concept to value investing, and the result is incredible.

In the 45-years backtest period from 1964 to 2009, the trending value generated a 21.19% CAGR, turning $10,000 into $69,1 Million. By investing in the entire stock market you would have made $1,33 million, and an 11.22% CAGR. That is 52 times the market return.

The process for picking stocks according to this strategy is more complex. We should download the screener result to a spreadsheet and rank stocks with the percentrank.inc formula.

But don't worry, you can find a detailed guide on applying this strategy here:

[How To Invest With The Trending Value Strategy](https://finbox.com/blog/how-to-find-value-stocks-value-stock-screener-criteria/#trendingvalue" target="_blank)

Conclusion

In this article, you've learned that there are 3 investment strategies that can help you beat the market. Those are the momentum strategy, the acquirer's multiple, and the trending value strategy.

Now you have everything you need to achieve extraordinary investment returns. However, most investors fail because of emotions and irrational behavior. So don't forget to be patient, disciplined and stick to the investment strategies' rules you've learned in this guide.

Keep Reading

If you find this article interesting, and you want to become better at investing, I suggest reading the following articles:

1. [7 Investment Tools That Will Boost Your Investment Returns](https://finbox.com/blog/investment-tools-that-will-improve-your-investment-returns/" target="_blank)
2. [Balance Sheet Analysis: 10 Ratios You Should Use](https://finbox.com/blog/balance-sheet-analysis-10-ratios-you-should-use/" target="_blank)
3. [The Importance of the cash conversion cycle](https://finbox.com/blog/the-importance-of-the-cash-conversion-cycle/" target="_blank)

Institutional investors spend more than $20,000 a year to get access to sophisticated investment tools with which they can get great returns on their investments. But don't worry, you don't have to spend that much!

In this article, I will show you 7 investment analysis tools that you can use right away and that allow both beginners and professionals investors to improve their returns.

#1 Top Investment Ideas Tools

If you already have a full-time job, if you don't have the time to invest in stock research and portfolio management, then this investing tool is perfect for you.

I'm talking of the Finbox [top investment ideas tool](https://finbox.com/ideas" target="_blank) that lets you track hundreds of pre-built portfolios, such as the portfolios of Warren Buffet, Ray Dalio, George Soros, Carl Icahn, and more. If you were looking for investment tools for beginners, this is definitely the tool for you.

[](https://finbox.com" target="_blank)

#2 The Finbox Fair Value Card

The [Finbox Fair Value Card](https://finbox.com/NASDAQGS:AAPL" target=_blank) is an advanced financial modeling technology that uses 11 different models to estimate the fair value of a stock and lets you get a company's fair value at your fingertips. Thanks to Finbox's partnership with S&P Global Market Intelligence, all the models are based on the same data utilized by the biggest investment banks and money managers in the world.

#3 Excel Add-In

Do you know that researches demonstrate 90% of spreadsheets have errors? That's often because of manual data entry! With the [Finbox Excel Add-In](https://finbox.com/integrations/excel" target="_blank) you can get the latest financial data directly in your spreadsheets and improve accuracy by pulling the latest data instantly into Excel or Google Sheets with a single formula.

Once you've developed a financial model just the way you want, you can reuse it for a different security just by changing the ticker in the spreadsheet.

It won't just help you to avoid errors, but to make things easier and quicker. The custom =FNBX() function allows you to import stock quotes, historical financials, valuation ratios, fair value estimates, and more.

[](https://finbox.com" target="_blank)

#4 Stock Screener

With over 100,000 stocks covered on 135+ exchanges in the world, the [Finbox stock screener](https://finbox.com/screener" target="_blank) is among the best investment tools out there. It lets you screen stocks for 1000+ metrics and, what's more, you can also create custom metrics once you export the result to Excel.

#5 Data Explorer

The [data explorer](https://finbox.com/NASDAQGS:FB/explorer" target="_blank) is a powerful tool for looking up specific metrics on a stock. It lets you explore definitions, formulas, trends, competitors and sector benchmark analysis, for more than 1,000+ metrics.

What's more, while most of the investing tools for stocks analysis just compare a stock's metric with the sector average, the Finbox data explorer gives you an in-depth sector benchmark analysis with the distribution of each metric for companies operating in a certain sector.

#6 Fundamental Chart Editor

The [fundamental chart editor](https://finbox.com/NASDAQGS:AAPL/charts" target="_blank) is one of the most popular investing tools, and there aren't many investment software that let you access that for free. For example, a subscription to Ycharts would cost you $200/month.

The fundamental chart tool lets you create powerful and comprehensive visuals for more than 1,000+ metrics and 100,000+ stocks around the world.

For example, you can easily evaluate if a stock is too expensive by comparing its valuation metric to the past and visualizing trends easily.

#7 Stocks Watchlist

The [Finbox Stocks Watchlist](https://finbox.com/watchlist" target="_blank) lets you track the stocks you are interested in by creating smart watchlists and customize views with the metrics that matter the most. You can also stay up-to-date with the latest news and data on the go with the mobile website.

What's more, you can easily analyze a group of stocks and see how they've performed in the past, what is their sector distribution, their dividend yield, their upside potential, and more!

Conclusion

To summarize, these 7 investment tools can help both beginners and professional investors to improve investment returns and analysis:

• [Top Investment Ideas Tool](https://finbox.com/ideas" target="_blank)
• [The Finbox Fair Value Card](https://finbox.com/NASDAQGS:AAPL" target=_blank)
• [Excel Add-In](https://finbox.com/integrations/excel" target="_blank)
• [Stock Screener](https://finbox.com/screener" target="_blank)
• [Data Explorer](https://finbox.com/NASDAQGS:FB/explorer" target="_blank)
• [Fundamental Chart Editor](https://finbox.com/NASDAQGS:AAPL/charts" target="_blank)
• [Stocks Watchlist](https://finbox.com/watchlist" target="_blank)

Keep Reading

If you find this article interesting, and you want to become better at investing, I suggest reading the following articles:

1. [Balance Sheet Analysis: 10 Ratios You Should Use](https://finbox.com/blog/balance-sheet-analysis-10-ratios-you-should-use/" target="_blank)
2. [How To Find Value Stocks: Stock Screener Criteria](https://finbox.com/blog/how-to-find-value-stocks-value-stock-screener-criteria/" target="_blank)
3. [The Importance of the cash conversion cycle](https://finbox.com/blog/the-importance-of-the-cash-conversion-cycle/" target="_blank)

Do you want to perform a sensitivity analysis in excel but you don't know how? Don't worry, you've come to the right place. In this article, you will learn how to conduct a sensitivity analysis in excel with a detailed step-by-step guide.

What's more, I've prepared for you a sensitivity analysis template both for Excel and Google Sheets. You will find the link to download them for free at the end of the article.

Before we start the guide, let's go over the basics of sensitivity analysis. Are you ready? Let's start.

What is Sensitivity Analysis?

If you are an investor, you already know that most of our investment decisions are based on future estimates. For example, while evaluating the intrinsic value of a business, we estimate the future cash flows it can generate based on several assumptions such as revenue growth, tax rate, EBIT margin, and so on.

The question is: What happens to the intrinsic value of the business if one of our assumption changes?

This is where sensitivity analysis comes in and this is why it is also known as what-if analysis. It is an analytical tool that lets you assess how a dependent variable (in this case, the intrinsic value of the stock) changes if you alter one or more independent variables (revenue growth, tax rate, and so on).

A two-way sensitivity analysis occurs if you vary the value of two input variables, while in the one-way sensitivity analysis, you change the value of just one input.

If it's still not 100% clear, It'll be with an example!

Sensitivity Analysis Example

Exactly 2 months ago, I published an [analysis](https://seekingalpha.com/article/4332831-fresenius-strong-buy-after-65-sell-off" target="_blank) of Fresenius ([DB:FRE](https://finbox.com/DB:FRE" target="_blank)) where I performed a two-way sensitivity analysis to evaluate how a change in my assumptions would have affected the internal rate of return of the investment.

The variables where the exit multiple and the tax rate.

The exit multiple is used to calculate the terminal value of a business while performing a discounted cash flow analysis. Even if we carefully select the ratio value with the appropriate methods (past trend, industry average, peers, etc.) it still is an arbitrary number that moves the needle in our model. For this reason, we should always check how a change in its value impacts our valuation.

Furthermore, I wanted to see how a change in the tax rate impacted my valuation because, as I wrote in the analysis "The 2020 Presidential Election that will be held this year could be an inflection point for the corporate tax rate," as you can read in [this report](https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000502295/2020%3A_An_inflection_point_in_global_corporate_tax%3F.PDF" target="_blank) from Deutsche Bank.

This was the result of the sensitivity analysis in excel.

Source: Author's Analysis Of Fresenius (Published on 18 March 2020)

I hope this sensitivity analysis example made things clearer. Now we can move on to the step-by-step guide to sensitivity analysis in excel.

Sensitivity Analysis In Excel: A step-by-step tutorial

Let's say you're analyzing a growth stock with the following metrics:

What this simple table tells you is that you'll obtain a 13,6% CAGR on your investment if the company's EPS grows by 15% per year for the following 5 years and its PE Ratio in 5 years will be 23,5.

A change in the EPS growth could significantly impact your investment return. For this reason, you decide that the best thing to do is to perform a one-way sensitivity analysis in excel.

One-Way Sensitivity Analysis In Excel

1. Create a table like the one below. You have to insert your current CAGR in the column and the EPS Growth variations in the rows.

2. Follow these steps to create a data table

3. Insert in the "Column Input Cell" the variable you want to analyze. We'll leave the "row input cell" empty because this is a one-way sensitivity analysis.

4. You can now observe how your investment return changes based on the EPS growth.

Now that you've learned how to perform a one-way sensitivity analysis in excel, let's see how to conduct the two-way one.

Two-Way Sensitivity Analysis In Excel

As we mentioned above, in the two-way sensitivity analysis we sensitize the output for two variables. Here's a step-by-step guide:

1. Create a table like the one below. You have to insert the output you want to sensitize top-left, and then your variables in the adjacent column and row.

2. Once you do that, select the table and follow the same process described earlier to create a data table.

3. This time we insert in the "row input cell" the F9 Cell (Pe Ratio Forecast) and the F8 cell (EPS Forecast) in the "column input cell".

4. You can now observe how your investment return varies based on changes in the EPS growth and the PE Ratio forecast.

Sensitivity Analysis: Excel & Google Sheets Template

It may be helpful to view the spreadsheet I got after the entire process. You can download it by clicking on the following links:

• [Excel](https://1drv.ms/x/s!ArJYyjekbCHppG1pKyat7Gem93H5?e=oz0nbt" target="_blank" target="_blank) Open the file, then click on File, Save As, Download a Copy
• [Google SpreadSheet](https://docs.google.com/spreadsheets/d/1_qRhEy3RaLvU1GhJTf2APQk0smw6TSdntc2wh66CAt8/edit?usp=sharing" target="_blank) Open the File, then click on File, Make a copy

[](https://finbox.com/integrations/excel" target="_blank)

Finbox is under active development, and we're continually pushing updates and improvements to the platform. Admittedly, we haven't done the best job of communicating new features as they're released. Going forward, we'll update this post as new features get added, and improvements are made to Finbox. Stay tuned!

May 22, 2020 — New Navigation, Company Overview & More

We're excited to roll out this update, which is one of the biggest since the launch of Finbox 3.0 last November. With this update, we introduce deep dives into a company's dividend history and earnings forecasts as well as improvements like full-screen mode for watchlist and screener tables, trend charts in the financial explorer, data exports from charts editor, and more! So let's get to it!

• Updated Navigation (New!)

The first order of business -- navigation updates. To make room for new tools that we're planning to introduce over the coming months and to ensure all existing tools are available with one click, we've added a new side-bar. On smaller screens, you may want to collapse the side-bar to increase screen space. The side-bar automatically expands when you hover over the icons.

We understand navigation changes can be annoying. I compare it to a stranger coming into my house and rearranging all my things, so rest assured we only do it when it's required.

• Dividend Explorer (New!)

The Dividends tab is the perfect place to start for all dividend hunters. You can now analyze everything about a company's dividend in one place (dividend yield, growth streak, expected payouts, and more.)

Compare Dividend Yields Over Time

You can view the daily dividend yield history for any company using this widget. It also allows you to compare dividend yield histories for various companies.

Annual Payout History

The Payout History widget gives you insight into the total dividends paid by a company during a calendar year.

Dividend Payment Dates

The Dividend History Details table lists details on the dividend payments made by a company.

• Earnings Explorer (New!)

Love them or hate them, earnings reports can cause big swings in a company's stock price and sometimes even the entire market. To give you better insight into how management has performed during prior earnings reports and prepare you for what's ahead, we've introduced several new widgets on this page. Key highlights below:

Upcoming Quarter's Earnings

We source forecast data from Standard & Poors. S&P aggregates forecasts from various brokers and equity research institutions. This widget allows you to better understand the market expectation for the upcoming quarter and how expectations have been revised over the last year:

Stock Price Reactions

Does management have a track record of exceeding analyst expectations? Does the market even care about a company's earnings report? You can glean this information from the Stock Price Reactions widget where quantify the impact of past earnings reports by comparing the stock price the day before earnings and the day after earnings once the market has processed the new information provided by management:

• Trend Charts in Financials Explorer (New!)

You can now instantly visualize the trends in financial statements using the charting tool in the Financials Explorer.

• Full Screen Mode For Tables (New!)

We heard you, data fiends - you want to data as quickly as possible. We've added a Full-Screen mode to the tables in Watchlist and Screener help:

• Table View And Data Export In Charts Editor (New!)

You can now view and export data from the Charts Editor:

May 16, 2020 — Edit Model Benchmarks & A New Currency Selector

• Model Benchmarks Editor (New!)

Finbox's benchmark selection algorithm considers various factors, including mentions in earnings calls, filings, business geography, industry, sector, as well as fundamentals factors like market capitalization, enterprise value, and valuation multiples to determine the appropriate set of benchmarks for any company. We make the ranked list available in the Data Explorer: Similar Companies.

These benchmarks are used in the financial models available for each company. If you're unhappy with the default benchmarks or just want to use a few different ones, you can now do so using the benchmarks editor. You can find the new tab labeled "Benchmarks Editor" in the model viewer. The benchmarks editor is enabled for any model where the benchmarks used have a material impact on the conclusion, including Revenue Multiples, EBITDA Multiples, P/E Multiples, Weighted Average Cost of Capital, and DuPont ROE Analysis:

• Watchlist Currency Selector (New!)

You can now view your Watchlist in any currency of your choice. By default, the Watchlist normalizes all data in the stock's trading currency so that the price matches what you see on the respective stock exchanges. It can be helpful when comparing groups of companies to view all data in the same currency.

Bug fixes & improvements

• Improved performance in the bulk ticker uploader in the Watchlist

May 7, 2020 — Y-Axis Scaling in Charts Editor

• Y-Axis Scaling In Charts Editor (New!)

When metrics are in different units of scale, it can be difficult to compare trends and performance. Common cases where since can be an issue are:

a) Comparing stock price performance of two or more companies
b) Analyzing a company's growth in earnings relative to the stock price
c) Benchmarking growth in balance sheet metrics like cash balance, total assets and total debt of two or more companies
d) Benchmarking the historical performance of income statement metrics like revenue, gross profit, margins and earnings per share (EPS)
e) Benchmarking forecasts for revenue, capital expenditures, and EPS

Stock price charts end up looking something like this:

Source: Apple, Google, Microsoft Stock Price Chart

Fundamental charts with valuation ratios like P/E Ratio and per-share metrics like EPS end up plotted on two different Y-Axes:

Source: Apple's Stock Price, P/E Ratio and EPS Chart

To make it easier to interpret the underlying trends you can now click the Start Y-Axis at 0 button in the options bar:

The stock price chart becomes a lot easier to interpret:

After scaling the stock price, P/E Ratio, and EPS chart, it becomes much easier to deconstruct the increase is Apple's stock price. Over the last five years, Apple's stock price has increased by 151.9%. About 47.2% percent of the rise in stock price can be attributed to Apple management's ability to grow earnings over that period.

Using the chart, we can also note that investors today are willing to pay 58.8% more for each dollar of Apple's earnings than they were five years ago since the P/E ratio has increased by that amount (aka multiple expansion).

Bug fixes & improvements

• Added support for Start Y-Axis At 0 button in the chart editor
• Fixed a bug in the screener related to sorting by 3-month total return
• Improved formatting of the selected page in table pagination controls

Imagine a group made up of 80 farmers and 20 journalists. In it is a person called Dave, who enjoys writing and regularly reads on politics, what profession do you think he most likely has? Most people would say he is a journalist, focusing on his habits and ignoring the fact the probability of him being one is only 1 out of 5. There are also a lot of farmers who like writing and regularly read on politics; we are safer placing our bets on objective details rather than stereotypical assumptions. This is the key essence of quantitative investing, a focus on hard facts over subjectivity in making investment decisions.

The Limitations of the Human Mind

The human mind is an amazing organ, capable of some truly superb cognitive feats but it is also in many cases very limited. Any mental models we create can never be truly objective, affected by our emotions and the selective way we process information. If we hate something, we tend to remain focused on its negative and vice versa. In decision making, most of us are naturally be biased towards what makes us feels right rather than what is right. This can lead to idiosyncratic outcomes where for the same situation, we could still arrive at contrasting judgments based because of how our emotions and inherent biases discriminate on what we process.

To illustrate with an example, imagine a person being given a sum of $100 and asked to share some of it with you. He only agrees to give you $5. Outraged, you refuse the offer. Now, rationally, you are better off having $5 dollars than having none but refusal is based on your emotional response to a sense of monetary injustice. If you were never told that the person has been given a $100 but instead, merely that he has $100 at present, you would have instead likely agreed to have that share.

Similar is the case with how many of us invest in the market and why bubbles tend to burst so spectacularly. Biases are something that even experts are vulnerable to. Back in 1929, the American economist, Irving Fisher, infamously predicted that the stock market had "reached what looks like a permanently high plateau." Just nine days later, the markets crashed and the Great Depression happened.

Fisher would still go on to dogmatically insist that a recovery was just around the corner and when that never transpired, he lost much of his credibility. As for the market crash itself, the bull trend in the months presiding the crash had been built purely on speculation, ignoring the signs of a slowing American economy.

Quantitative Investing: The Supremacy of ‘Boring’ Data-Driven Models

A research conducted back in 2005 found that participants with a neurological disorder that inhibited emotions actually made more advantageous investment decision than their normal counterparts. Ironically, because they were less emotionally invested in their decisions, they were able to apply a more consistent in their investing strategy while normal participants, regardless of a winning or losing money, became more and more conservative in each subsequent investment round for fear of losing.

Of course, even an emotionless ‘rational’ individual might still make a decision with suboptimal outcomes because of our brain’s tendency to take information shortcuts – subconscious assumptions, stereotypes, and the creation of entirely fictitious information to fill in the gaps in our memory.

Models born out of quantitative analysis, however, neither suffer from emotions nor inconsistency in information and thus, help generate decisions that tend to be consistent and thus, reliable.
Unlike us, quantitative models can’t be concerned with reputation; don’t get heavily influenced by some tweets; have likes or dislikes nor care about what others are doing. Rather than extrapolate projections based on what are mere assumptions, they only ‘boringly’ process large samples of existing data and arrive at its outcome.

Unsurprisingly, much of the market transactions that take place nowadays are done not by humans but by advanced A.I algorithms making use of complex quantitative models to predict trends. In fact, it is estimated that, in terms of volume, 80% of the stock market is controlled entirely by the A.I.

Concluding Note

Rather than colorful stories or rosy paradigms on a financial situation, a qualitative approach is all about taking into account probabilities to make decisions. The surest way to predict the market is by betting on the best rates derived from large enough samples.

We are naturally inclined to trust our gut feelings but it is because this that we have cases of companies 90+ times their earnings. Many investors must have felt that they are making a good investment but as for reality, chances of such stocks beating the market are less than 1%.

Quantitative Investment Strategies You Can Use Right Now

Do you know you can apply two quantitative investment strategies right now? I'm talking about The Acquirer's Multiple and the Trending Value. These 2 strategies consistently outperformed the market to a large extent in the last 50 years, generating a 17.9% CAGR and a 21.19% CAGR, respectively.

We wrote for you a step-by-step guide in which we teach you how to apply these strategies right now. You can read the guide for free here: [Quantitative Investment Strategies Guide](https://finbox.com/blog/how-to-find-value-stocks-value-stock-screener-criteria/" target="_blank).

What is the cash conversion cycle? How to calculate it with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about the cash conversion cycle. Furthermore, you will have access to an excel template that lets you calculate the cash conversion cycle for more than 65,000 companies with just one click.

What is the Cash Conversion Cycle? Why Is it important?

The cash conversion cycle (CCC) calculates how much time passes between the time the company uses cash to pay suppliers, and the time it receives cash from its customers.

The cash conversion cycle is an important quantitative measure of the efficiency of a company’s operations. It is better to see a lower cash conversion cycle because it means the company is collecting cash quickly from its customers and, at the same time, has more flexibility in paying its suppliers.

It’s important to remember that the cash conversion cycle can’t be applied to every sector, especially those that have no need for inventory. For example, whereas large retailers like Walmart focus on managing and selling inventory, insurance companies are not dependent on any kind of inventory to generate profit.

You may be wondering: but what is a good cash conversion cycle? A good CCC is one that is in line with the sector average. A too low cash conversion cycle may indicate that the company has some difficulties in paying its suppliers, while a too high CCC may indicate that the company can't collect cash from its customers in a reasonable time.

You can check that your stocks cash conversion cycle is ok by comparing it with the other companies in the sector using the Finbox data explorer. Just follow these simple steps:

1. Sign Up for free at Finbox

2. Go to the Finbox data explorer

3. Select the company and the metric you want to check (In this case we want to check the cash conversion cycle)
   

4. Scroll down to Sector Benchmark Analysis
   

5. Control in what decile are your stocks ( As you can guess, Apple is efficiently managing its business by collecting cash quickly from its customers while having a lot of flexibility in paying suppliers.)

How to calculate the cash conversion cycle with the right formula

CCC = DIO+DSO-DPO

DIO = Average Inventory / (Cost of Sales / 365)
DSO = Average Accounts Recievable / (Sales / 365)
DPO = Average Accounts Payable / (Cost of Sales / 365)

The cash conversion cycle is calculated by subtracting days payable outstanding from the sum of days of inventory outstanding and days sales outstanding. Days inventory outstanding (DIO) is calculated by dividing the average inventory by the daily cost of sales (cost of sales / 365). Days sales outstanding (DSO) is calculated by dividing the average accounts receivable by daily sales (sales / 365). Days payable outstanding (DPO) is calculated by dividing the average accounts payable by the daily cost of sales (cost of sales / 365).

Cash Conversion Cycle: Benchmarks by Sector

As of May 14, 2020, the sectors with the highest cash conversion cycles are healthcare, materials, and industrials. Energy, real estate, and telecommunication services are the sectors with the lowest cash conversion cycles.

You can get up to date stats and graphs like this directly in Excel with the Finbox Excel Add-in

Cash Conversion Cycle: Example [+Excel Template]

I’ve created an example calculation of the cash conversion cycle to try out. To explore the CCCs of the 65,000+ companies that Finbox supports, just change the ticker in the spreadsheet. Click here to open the spreadsheet in Google Sheets. Select File > Make a copy to modify the example calculation. If you are not already registered on Finbox, all you have to do is sign up for free here.

Don't do the math yourself. Let us do the work!

Finbox makes it easy to calculate the net working capital of 65,000+ companies with just one click. All you have to do is sign up for free at Finbox and use our powerful data explorer.

What is the EV to EBITDA multiple? How to calculate the EV/EBITDA ratio with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about it. Furthermore, you will have access to an excel template that lets you calculate EV/EBITDA for more than 65,000 companies with just one click.

What is the EV to EBTIDA multiple?

EV/EBITDA is the ratio between the enterprise value and the EBITDA of a company. The valuation metric compares the debt-included value of a company to its cash earnings. Investors and analysts typically use it to compare business within the same industry. EV/EBITDA functions in a similar fashion to P/E, but it is more useful when comparing business with varying degrees of financial leverage and valuing capital-intensive companies with abnormal levels of depreciation and amortization.

How to calculate the EV/EBITDA multiple with the right formula

The EV/EBITDA ratio is calculated quite simply: just divide the enterprise value of a company by its EBITDA.

Enterprise Value: Enterprise Value (EV), also referred to as Business Enterprise Value (BEV), reflects the market value of the entire business. In laymen’s terms, it’s the amount an acquirer would have to pay to buy a business. In valuation terms, enterprise value represents the market value of the company’s total operating assets.

= Market Capitalization

(+) Total Debt
(+) Minority Interest and Other Liabilities
(+) Preferred Equity

(-) Cash and Short Term Investments
(-) Long Term Investments

(-) Other Adjustments

EBITDA: EBITDA is defined as Earnings before Interest, Taxes, Depreciation and Amortization excluding unusual items. It is a commonly used metric in valuation as a proxy for operating profitability. EBITDA gives us a clearer picture of profitability when comparing companies with different capital structures. (You can find a detailed EBITDA explanation at [this article](https://finbox.com/blog/ebitda-definition-formula-how-to-calculate/" target="_blank)).

= Earnings Before Taxes

(+) Net Interest Expense
(+) Non Operating Expenses

(+) D&A
(+) Unusual Expenses

Why is the EV/EBITDA ratio important?

You'll be surprised to learn that, according to James O'Shaughnessy's research, stocks with a low EV to EBITDA widely outperform the market.

In his studies, he considers the entire U.S. stock market and divides the stocks into 10 deciles according to EV to EBITDA ratio. Stocks in the highest decile (those with the highest EV to EBITDA) drastically underperform the market, while those in the lowest decile (those with the lowest EV to EBITDA multiple) widely outperformed it.

In the 45-year backtest period between 1964 and 2009, stocks in the highest decile (those with the highest EV to EBITDA) generated a 5% CAGR compared to the 11.22% CAGR of the overall market. At the same time, stocks in the lowest decile (those with the lowest EV to EBITDA) generated a 16.58% CAGR.

If you don't want to underperform the market, you should definitely check in which decile your stocks are. You can do that with the Finbox data explorer. Just follow these simple steps:

1. Sign Up for free at Finbox

2. Go to the Finbox data explorer

3. Select the company and the metric you want to check (In this case we want to check the EV to EBITDA)
   

4. Scroll down to Sector Benchmark Analysis
   

5. Control in what decile are your stocks (If your company is in the lowest decile, you will likely underperform the market.)

EV to EBITDA: Benchmarks by Sector

As of May 14, 2020, the sectors with the highest EV/EBITDA multiples are real estate, utilities, and consumer staples. Financials, energy, and materials are the sectors with the lowest EV/EBITDA multiples.

You can get up to date stats and graphs like that directly in Excel with the [Finbox Excel Add-in](https://finbox.com/blog/using-the-excel-add-in/" target="_blank).

EV to EBITDA Example [+ Excel Template]

I’ve created an example calculation of EV/EBITDA to try out. To explore the EV/EBITDA ratios of the 65,000+ companies that Finbox supports, just change the ticker in the spreadsheet. Click [here](https://docs.google.com/spreadsheets/d/17mFjFumv7TnnfZQb36EUjOFQjtZeUDt_jJeA4_y-yRA/edit?usp=sharing" target="_blank) to open the spreadsheet in Google Sheets. Select File > Make a copy to modify the example calculation. If you are not already registered on Finbox, all you have to do is sign up for free here.

Don't underperform the market!

Finbox makes it easy to find companies with a low EV / EBITDA multiple. View the top 100 stocks with the lowest EV/EBITDA multiples [here](https://finbox.com/screener/4212" target="_blank).

What is the fixed asset turnover ratio? How to calculate the fixed asset turnover ratio with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about the fixed asset turnover ratio. Furthermore, you will have access to an excel template that lets you calculate the fixed asset turnover ratio for more than 65,000 companies with just one click.

What is the Fixed Asset Turnover Ratio? Why Is it important?

The fixed asset turnover ratio (FAT) helps determine a company’s ability to generate revenue from its fixed assets. Property, plant, and equipment (PP&E) typically make up the majority of a company’s fixed assets. As a result, the fixed asset turnover ratio is mostly used in the manufacturing industry since they frequently make PP&E purchases. Investors will sometimes use the FAT ratio to track if a company’s new investment in fixed assets actually helped generate more sales.

While a high FAT ratio indicates that a company is effectively creating revenue from its fixed asset investments, there is no accepted range that is considered “efficient”. Consequently, it’s vital to draw conclusions with the fixed asset turnover ratio through comparison, either through company historicals or peer and industry averages. It’s also important to calculate the FAT ratio over time. This is because a company could have cyclical sales or be in the process of outsourcing its production, leading to an over or underexaggerated fixed asset turnover.

A too low fixed asset turnover ratio compared to the sector average may indicate that the company is not using its asset efficiently. Obviously, there is a high chance that an inefficient business brings you low returns. You don't want to get poor returns, do you? The best way to know if your companies' fixed asset turnover ratio is good is to compare it to the other companies in the sector.

How can you check that? Simple! All you have to do is use the Finbox data explorer. Just follow these simple steps:

1. Sign Up for free at Finbox

2. Go to the Finbox data explorer

3. Select the company and the metric you want to check (In this case we want to check the fixed Asset Turnover ratio)
   

4. Scroll down to Sector Benchmark Analysis
   

5. Control in what decile are your stocks (If your company is in the lowest decile, there is a high chance of underperforming the market. As you can guess, Apple is not at risk.)

How to calculate the fixed asset turnover ratio with the right formula

Fixed Asset Turnover = Revenue / Average Fixed Assets

The fixed asset turnover ratio is calculated by dividing a company’s revenue by its average fixed assets over the same period. Since revenue is generated over the course of a year, fixed assets are averaged between the start and end of the year.

Fixed Asset Turnover ratio: Benchmarks by Sector

As of May 14, 2020, the sectors with the highest fixed asset turnover ratios are information technology, financials, and communication services. Utilities, Energy, and Materiales are the sectors with the lowest fixed asset turnover ratios.

You can get up to date stats and graphs like that directly in Excel with the
Finbox Excel Add-in.

Fixed Asset Turnover ratio Example [+Excel Template]

I’ve created an example calculation of fixed asset turnover to try out. To explore the FAT ratios of the 65,000+ companies that Finbox supports, just change the ticker in the spreadsheet. Click here to open the spreadsheet in Google Sheets. Select File > Make a copy to modify the example calculation. If you are not already registered on Finbox, all you have to do is sign up for free here.

Don't underperform the market!

Finbox makes it easy to find companies with strong fixed asset turnover ratios. View the top 100 stocks with the highest fixed asset turnover ratios here.

You keep reading online that the best investors in the world have achieved extraordinary returns because they understood how to find undervalued stocks. You keep reading that investing it's all about learning how to find value stocks trading at a discount to their real value. You keep reading that you can beat the market by doing that.

But the question is: How do you actually find value stocks? What is the process and how can you be sure that this will help you to beat the market and achieve extraordinary returns? What stock screener criteria should you use?

Don't worry, in this article, you will learn how to find value stocks with time-tested stock screener criteria. You will learn how to find value stocks that actually beat the market by a large extent almost 100% of the time. Are you ready? Let's start.

Value Stock Screener Criteria #1: The Acquirer's Multiple

Did you ever hear of the Acquirer's Multiple Strategy? If you didn't, chances are you missed the opportunity of getting great returns on your investments.

Indeed, by investing in this strategy from January 1, 1973, to December 31, 2017, you would have obtained a compounded annual return of 17.9%, turning $10,000 into $14,9 Million. Do you know what $10,000 would have been if you just invested in the whole market? $741,737.
Yes, you read that correctly. You would have achieved 20 times the market return.

What's more, the Sharpe Ratio of the strategy is 0.61 compared to 0.33 of the whole market. This makes the Acquirer's multiple a better choice even from a risk-adjusted return perspective.

The strategy was developed by Tobias Carlisle and it's all about finding value stocks that are trading at discount to their real value by using the EV to EBIT multiple. All you have to do is select the 30 stocks with the lowest EV to EBIT and a minimum market cap of $1 Billion.

How to find value stocks using the Finbox Screener

Are you ready to learn how to find value stocks that beat the market with this strategy? All you have to do is following these simple steps:

1. Create an account for free at Finbox

2. Launch the Finbox Stock Screener.

3. Add a metric by clicking on the "+'" button

4. Add the “Market Cap” metric, and filter for stocks with a minimum market cap of $1 Billion.

5. Press the green "+" button

6. Add the EV to EBIT metric.

7. Sort the stocks by clicking on the Enterprise Value / EBIT tab.

8. Pick the 30 stocks with the lowest EV to EBIT multiple

Value Stock Screener Criteria #2: The Trending Value

If you like the idea of getting a 17.9% CAGR with a simple strategy, you'll be happy to know that there is another quantitative investment strategy that is even better. This is the trending value, a strategy developed by James O' Shaughnessy and published in his famous book What Works On Wall Street.

By investing in this strategy from January 1, 1964, to December 31, 2009, you would have obtained a compounded annual return of 21.19%, turning $10,000 into $69,098,587. That is 52 times the market return. Indeed, if you had invested in the whole market, you would have got just $1,329,513 with an 11.22% CAGR.

It's unbelievable, isn't it?

Guess what. Even in this case, it's all about learning how to find value stocks. There are just two differences: the first one is that instead of using just one ratio, we'll use a composite one; the second one is that we'll combine value to momentum to get the best result.

As you can guess, this time the process is a little bit more complicated. We need to export the screener results to Excel and rank stocks through the percentrank.inc function. But don't worry, I've prepared a detailed step-by-step guide to help you do that.

Before we start, let's review the strategy's rules:

Universe: We'll consider US + ADR stocks with a minimum market cap of $250 Million.

Value: The first thing we're going to do is select the 10% of stocks in our universe with the best value score. In this case, we don't use just a single ratio for that, but multiple ones. We'll pick the 10% of stocks with the best value according to the following value factors:

• Price to book value
• Price to sales
• EV/EBITDA
• Levered Free Cash Flow Yield
• Earnings Yield
• Shareholder Yield (Dividend yield + Buyback Yield)

Momentum: Once we found our group of undervalued stocks, we'll select only the 25 stocks with the best 6-month momentum.

How to find trending value stocks: a step-by-step guide

In the video below you can find a step-by-step guide to using the strategy. I've also written a checklist under the video with the link to the [pre-built screener](https://finbox.com/screener/s-fj6mebqu" target="_blank) and ready-to-use formulas.

1. Go to [this screener](https://finbox.com/screener/s-fj6mebqu" target="_blank) and export the results to Excel

2. Delete foreign stocks duplicates

3. Get the reciprocals of PB, PS, and EV/EBITDA

4. Make sure to give the new columns the same name I used so that you can just copy and paste the formula

5. Format as table

6. Use the percentrank.inc function to rank stocks. You can copy and paste the following formulas:

Column 1

=PERCENTRANK.INC([Book / Market];[@[Book / Market]])+PERCENTRANK.INC([Sales / Market Cap];[@[Sales / Market Cap]])+PERCENTRANK.INC([EBITDA / EV];[@[EBITDA / EV]])+PERCENTRANK.INC([Free Cash Flow Yield];[@[Free Cash Flow Yield]])+PERCENTRANK.INC([Earnings Yield];[@[Earnings Yield]])+PERCENTRANK.INC([Net Payout Yield];[@[Net Payout Yield]])

Column 2

=PERCENTRANK.INC([Column1];[@Column1])

7. Select the first decile of stocks for value

8. Pick the 25 stocks with the best 6-month momentum

It may be helpful to view the spreadsheet I got after the entire process. You can download it by clicking on the following links:

• [Excel](https://1drv.ms/x/s!ArJYyjekbCHppEu7uIIbwSTQGqBk?e=CFURci" target="_blank) Open the file, then click on File, Save As, Download a Copy
• [Google SpreadSheet](https://docs.google.com/spreadsheets/d/15z9blMoZFI41wzWqX54gXFr46SAwG5GZGOpyFZXoGvs/edit?usp=sharing" target="_blank) Open the File, then click on File, Make a copy

Finbox is here for you

I hope this article came in handy. And remember: here at Finbox, our mission is to take your investment to the next level. So, if you have any doubts, don't hesitate to ask. To contact us, sign up for free, and leave a message in the chat. We usually respond within 24 hours.