Do WPP (LON:WPP) shares offer a great opportunity for value investors?

Here's why FTSE 100 listed advertising & marketing giant WPP (LON:WPP), which generates sales of over £15.6 billion a year from operating in over 110 countries, offers a compelling proposition for value investors. 

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 %

The Value Rank: how does WPP stack up?

We can see by using WPP's StockReport that the group has a:

• Rolling price to book value of 1.17 vs an industry median of 1.49
• Rolling price to earnings ratio of 8.68 vs an industry median of 12.5
• Trailing twelve-month price to free cash flow of 8.34 vs an industry median of 13.8
• Rolling dividend yield of 6.84% vs an industry median of 3.73%
• Trailing twelve-month price to sales ratio of 0.71 vs an industry median of 0.9

All of the ratios above indicate that WPP looks to be grossly undervalued when compared to its industry peers. In fact, when we compute all of these metrics together, we find that WPP boasts an impressive Value Rank of 89. Investing in high-value stocks requires skill, savviness and plenty of patience but, when cheap stocks come good, the payoff can be extremely rewarding. 

WPP’s Value Rank of 89 puts it in the cheapest quartile of the stock market. That is certainly a promising jump off point for our analysis but it is not the whole story.

By combining factors such as value with quality, or value with stocks whose share prices are trending upwards, one can still further improve their chances of finding even better investment opportunities. Considering WPP's Value Rank with its Quality and Momentum Ranks can prove to be a wise strategy. 

Next Steps...

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with WPP that you can find out about here.