Here's why how cheap or expensive shares in large cap Integrated Mining operator BHP (ASX:BHP)matters.
Stacks of academic research covering different time frames and regions of the world all come to the same conclusion: over time and on average, cheap stocks outperform expensive stocks.
This sounds so glaringly simple and obvious. So, how come we're not all rich?
The fact is cheap shares are often cheap for a reason. They can look unappetising. And, while the evidence shows that maintaining a value strategy through boom and bust will be rewarded, sticking with it is actually extraordinarily hard. Yet the evidence is so compelling that value is one of Stockopedia's three main factors in investment returns.
One of the masters of value (and factor) investing is Jim O'Shaughnessy, the founder of O’Shaughnessy Asset Management (OSAM). In the 4th edition of his groundbreaking investment research tome What Works on Wall St, O’Shaughnessy showed that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.
It was from this robust insight that Stockopedia’s Value Rank was born, its synergy coming from the following simple valuation ratios:
- Price to Book Value
- Price to Earnings
- Price to Free Cash Flow
- Dividend Yield %
- Price to Sales
- Earnings Yield %
How does BHP stack up?
BHP's Value Rank
We can see by using Bhp’s StockReport that the group has a:
- Rolling price to book value of 1.66,
- Rolling price to earnings ratio of 8.46
- Trailing twelve-month price to free cash flow of 7.84
- Rolling dividend yield of 8.71%
- Trailing twelve-month price to sales ratio of 1.74
When we add all of these together, we find that Bhp has a Value Rank of 83. Investing in high-value stocks requires finesse and a sturdy constitution but, when cheap stocks come good, the payoff can be large and sudden.
BHP's Value Rank of 83 puts it in the cheapest quartile of the stock market. That is certainly a promising jumping off point for our analysis but it is not the whole story.
Studies indicate that combining factors such as Value, Quality and Momentum is a more effective way of outperforming the market over longer time frames. That's why we have constructed our StockReports to give an instant impression of how well exposed Bhp (ASX:BHP) is to these three factors. We go into greater detail on factor investing in this video.
Stockopedia helps you to identify return-enhancing factors such as Quality, Value and Momentum by analysing thousands of data points every day. To find out more about you find investment opportunities and analyse your portfolios then take one of our two-week free trials and have a look around.