Cap Rate is a real estate
valuation measure used to compare different real estate investments.
«Capitalization rate (or «Cap Rate») is a real estate
valuation measure used to compare different real estate investments.
Thank goodness the relationship is weak, as current valuations for low beta stocks are well into the top decile of historical experience regardless of
the valuation measure used.
These are six
valuation measures I use in my own investing.
Not exact matches
Given that
valuations were already rich when the VIX, a commonly
used measure of S&P 500 volatility, was at 10, a doubling of volatility suggests stocks should be trading closer to 16 or 17 times earnings, not 21.
The results below are specific to methods we actually
use, but I expect that they could be broadly replicated
using any basic combination of
valuations (say, Shiller PEs), and market action (say, moving averages or breadth
measures).
«On the other hand,
using the same essential
measures of
valuation and market action, but including periods of major economic dislocation into the dataset, produces average return / risk inferences that are substantially less favorable.
It doesn't matter whether one looks at basic
measures such as median
valuation multiples over the past (bull market) decade, or whether one
uses a more complex discounted cash flow model.
With all due respect, if there is no way to come up with a value for gold itself aside from where it's currently trading, you're on shaky ground
using its
valuation to fundamentally
measure some other thing that is only vaguely analogous.
Even within my dividend portfolio, I combine DCA (with automatic DRIP), and market timing strategies (by
using PE as a
valuation measure in deciding whether to add to existing positions or buy into new ones).
While we certainly believe there are better
valuation measures than the Shiller P / E (particularly MarketCap / GVA), we
use it below because it is widely followed.
This is why we
use a variety of
measures to gauge
valuations - you can't capture the whole
valuation picture with only one.
Suppose we
measure valuation by comparing price P to some
measure of earnings E that isn't distorted by cyclical economic fluctuations, and can be
used as a reliable, representative, «sufficient statistic» for long - term cash flows.
Given that
valuations were already rich when the VIX, a commonly
used measure of S&P 500 volatility, was at 10, a doubling of volatility suggests stocks should be trading closer to 16 or 17 times earnings, not 21.
I
use Professor Robert Shiller's P / E10 to
measure valuations.
Since traditional
measures of
valuation are broadly overvalued, analysts who are recommending additional equity exposure tend to
use P / E ratios based on future estimates for operating earnings.
Investing based on size,
measured by company market capitalization, would
use only the price side of the
valuation measure.
[Geek's note: regression analysis relating
valuation measures to subsequent returns should always
use log values.
With world stock markets pumped full of newly - printed cash, some people are calling for a major correction: stock
valuations don't seem to reflect earnings or profits or anything else which
used to be a
measure of value.
Now we demonstrate the robustness of our findings by broadening the study to include new factors and strategies, consider various forecast horizons, and
use alternative
valuation measures.
Our findings are robust for both factors and smart beta strategies across horizons out to five years,
using both a simple price - to - book ratio and an aggregate
valuation measure, in U.S., developed ex U.S., and emerging markets.
In our first article, we
use P / B to
measure relative
valuation.
Almost all of the factors and smart beta strategies exhibit a negative relationship between starting
valuation and subsequent performance whether we
use the aggregate
measure or P / B to define relative
valuation.9 Out of 192 tests shown here, not a single test has the «wrong» sign: in every case, the cheaper the factor or strategy gets, relative to its historical average, the more likely it is to deliver positive performance.10 For most factors and strategies (two - thirds of the 192 tests) the relationship holds with statistical significance for horizons ranging from one month to five years and
using both
valuation measures (44 % of these results are significant at the 1 % level).
Generally, we observe stronger correlations with future returns when we
use aggregate relative
valuation measures compared to
using P / B alone.
We
use an aggregate of four
valuation measures in addition to the sole metric of P / B, and we investigate horizons of one month and one to five years.
Low beta is the primary exception in our results, showing only one instance of statistical significance — at the 10 % level for the two - year horizon (matching the half - life),
using the blended
valuation measure — over the entire combination of horizons and two
valuation measures.
In this article, we present evidence that the relationship between current relative
valuation and subsequent performance for both factors and smart beta strategies is robust over horizons shorter than five years and
using valuation measures other than price - to - book (P / B) ratio.
Value (
using both forms, B / P and blended) falls in the bottom quintile of its historical
valuation in both international and emerging markets; of 12 comparisons (U.S., international, and emerging markets, constructed
using both B / P and the blended
valuation, and with relative
valuation measured versus both P / B and the aggregate
measure), 11 suggest value is trading cheap, with 5 in the bottom decile of the historical
valuation range.
Even within my dividend portfolio, I combine DCA (with automatic DRIP), and market timing strategies (by
using PE as a
valuation measure in deciding whether to add to existing positions or buy into new ones).
The results of our analysis are generally a bit stronger when the aggregate
valuation measure is
used, but three of eight factors (value blend, momentum, and investment) and two of eight smart beta strategies (Fundamental Index and dividend index) show a stronger correlation when the P / B
valuation measure is
used.11 The aggregate
valuation measure is likely stronger because it captures differences in profitability that can be missed by P / B.
When relative
valuation is gauged
using the aggregate
measure (reported in the right-most column of Tables 1 and 2 for both aggregate and P / B
valuations), we find that the cheapest stocks based on B / P are no longer cheap.
Bogle has typically
used dividends as a fundamental, but sales and smoothed
measures of earnings can also be
used, provided that the corresponding
valuation multiples are
used.
A more robust and lasting
measure of value
uses all three
valuation estimates: price - to - book ratio, forward - looking price - to - earnings ratio, and enterprise value - to - cash flow from operating activities.
2Shiller P / E ratio is a
valuation measure, generally applied to broad equity indices, that
uses real per - share earnings over a 10 - year period.
Satisfactory
measures of
valuation include P / E10, P / D10 and Tobin's q. NOTE: You can
use the Stock Return Predictor to convert P / E10 into current S&P 500 prices.
My point is that there are a variety of highly predictive, methodologically distinct
measures of market - level
valuation (I
used the Shiller PE and Tobin's q, but GNP or GDP - to - total market capitalization below work equally as well) that point to overvaluation.
FASB also clarified existing disclosure requirements relating to the levels of disaggregation for fair value measurement and inputs and
valuation techniques
used to
measure fair value.
Practitioners increasingly
use the enterprise multiple as a
valuation measure.
The inputs and
valuation techniques
used to
measure fair value of the Funds» investments are summarized into three levels as described in the hierarchy below:
In the context of your series on
valuation metrics and equity expected returns, I'd be interested in your thoughts on our meta - study of market expected returns
using various smoothed PE ratios, the Q ratio, mkt cap / GNP and regression to trend
measures.
Inputs refer broadly to the assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular
valuation technique
used to
measure fair value including such a pricing model and / or the risk inherent in the inputs to the
valuation technique.
The returns you get are a product of the difference in the entry and exit
valuations, and the change in the value of the factor
used to
measure valuation, whether that is earnings, cash flow from operations, EBITDA, free cash flow, sales, book, etc..
One can
measure an object's value by different standards, such as actual material
valuation, functionality, or sentimentality... The objects and materials that I
use are for the most part egalitarian.»
Two reviewers will independently assess the suitability of the preference - based instruments for
measuring outcomes in palliative care
using the ISOQOL, minimum standards for patient - reported outcome
measures (conceptual and measurement model, reliability, content validity, construct validity, responsiveness, interpretability of scores, translation of
measure, patient and investigator burden), 43 and the CREATE checklist (descriptive system, health states values, sampling, preference data collection, study sample, modelling, scoring algorithm).44 The ISOQOL minimum standards were chosen as these standards were developed from a systematic review of published and unpublished guidance on patient - reported outcome
measures, including the COnsensus - based Standards for the selection of health Measurement Instruments (COSMIN).46 To the authors» knowledge, the CREATE checklist is the only published guidance on what key components should be reported in a
valuation study.44 Information on how the contents of the instruments were developed, psychometric properties and
valuation will be
used to assess the suitability of the instruments for the palliative setting; instruments will be scored on whether the domains or dimensions were developed
using input from informal caregivers of people receiving palliative care (yes / no) and whether each of the reporting checklist items has been evaluated for this population (if yes, then a score of one will be allocated) and a total score calculated.
Finally, the degree of suitability of the instruments for economic evaluations in the palliative care setting will be assessed by scoring whether the domains or dimensions were developed
using input from informal caregivers of people receiving palliative care and whether items from the International Society for Quality of Life Research (ISOQOL) 43 minimum standards for patient - reported outcome
measures and the checklist for reporting
valuation studies of multiattribute utility - based instruments (CREATE) 44 have been evaluated in this population.