Everyone loves a bargain but choosing a strategy for finding mispriced shares isn't as simple as it seems. Eighty years after Ben Graham and David Dodd laid the groundwork for what's known as value investing, some of the brightest minds in finance are still working on the best ways of capturing deep value. Given that research has long shown that cheap beats expensive over the long run, honing a value strategy is clearly worth exploring. So where do you start?
When Graham and Dodd wrote Security Analysis in 1934, they changed the rules on how investors should think about stocks. Chastened by catastrophic stock market losses a few years earlier, they urged investors to stop chasing expensive 'glamour' and obsessing about earnings growth. Instead, they showed that it was mispriced and undervalued stocks that offered the best chance of outperformance.
Ever since, investors have deployed an armoury of metrics to help them find shares that don't reflect the expected value of the companies behind them. Usually, they compare a company's share price against what it earns - such as the price to earnings ratio - or against what it owns - such as the price to book ratio.
One value ratio is never enough
When it comes to these value ratios, investors often stick to their favourites. Just take a look at the the guru strategies we track at Stockopedia - many of them use just one valuation metric. But others think it's too simplistic to use a single ratio to find and compare value stocks. In 2014 the equity research team at investment bank Societe Generale tackled this head on.
Led by quant strategist Andrew Lapthorne, they'd already been tracking one value strategy called Quality Income. As the name suggests, it looks for good quality, dividend paying companies. But the focus on relatively high dividend yield is also a signpost to shares that might be cheaply priced. Quality Income was devised for what SocGen call 'patient' value investors. These are the ones who are happy to let dividends compound over time in return for less volatility than you see in other types of value strategies.
But Quality Income doesn't get its hands dirty with another major source of value in the market. This is the one that most of us think of when it comes to deep value - buying beaten up, distressed, unloved and ignored stocks. Some of these…
