It has long been understood that cheap stocks have a tendency to outperform expensive stocks in the stock market. While this is not true every single year, over almost every 3-year cycle in the stock market, cheap (or value) stocks outperform. This phenomenon has created the cult of 'Value Investing' born of the writings of Benjamin Graham and the amazing success of its arch proponent Warren Buffett.
On an extremely long-term, multi-decade view, value is perhaps the only filter through which to think about stocks. Of course, with average investors holding stocks for less than a year, plenty of other factors come into play during that timeframe. Nevertheless, when we are researching a stock, we can’t ignore whether it is cheap or expensive.
According to Stockopedia’s calculations, Experian (LON:EXPN) is very expensive. Here's why.
Breaking down Experian’s low Value Rank
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 shows that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.
It was from this powerful insight that Stockopedia’s Value Rank was born. We can see it in action. Experian has a:
- Trailing twelve month price to book value of 14.3,
- Rolling price to earnings ratio of 35.8,
- Trailing twelve-month price to free cash flow of 53.1,
- Rolling dividend yield of 1.33%, and a
- Trailing twelve-month price to sales ratio of 6.64...
When compared to other stocks in the market, this makes for a Value Rank of just 10.
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 Experian (LON:EXPN) 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.