The purpose of the hypothetical portfolio is to track returns for a portfolio of 15 stocks selected based on a
variety of valuation metrics.
Unless the shares are cancelled they still count in terms of calculating any
type of valuation metric — so you spend cash but actually buy nothing.
And it should also be understood that a historical performance
result of every valuation metric in between could also be the source of good or bad historical performance.
There are many
forms of valuation metrics such as Price Earnings Ratio (PE), Enterprise Value / EBITDA, Enterprise Value / Sales, Price to Book (PTB).
There are pros & cons to debate for all of the above, and there's no reason to pick just one from the
welter of valuation metrics / ratios / techniques available... In fact, while it's more demanding, I'd argue that assessing a variety of valuation approaches and results is far more useful to you as an investor.
European equities are not that cheap anymore by a
number of valuation metrics; they are trading at an average of about 17 times earnings, which is not a wide undervaluation.1 In my view, the main reason to invest in European equities is the potential for, or the expectation of, a rise in corporate earnings that would be driven by the improving economic environment.
We show that variations in valuation levels predict subsequent returns and that this relationship is robust across geographies, strategies, forecast periods, and our
choice of valuation metrics.
Stocks were sold if
any of the valuation metrics listed above exceeded 25 % of the sector median, if the three - month price momentum turned negative, or if the stock surprised negatively by more than 5 %.
Then I take all of my ideas once per quarter, shortly after the 13Ds are filed, and compare them against existing portfolio holdings against a variety
of valuation metrics, sentiment variables, and other factors.
Valuation: IMN is cheap based on a number
of valuation metrics.