Visual Factors

Tool Information ( back to top )

What Does This Tool Do?

This tool seeks to visually plot how equity valuations have changed over time according to specific factors. 

  • This tool maps out the ratio of the median valuations for the top decile “cheap stock” portfolios (e.g., EBIT/TEV or Sales/Price) and the median valuations for the respective universes (e.g., US or Foreign Developed countries).
  • An increasing ratio implies that the cheapest decile portfolio for a given factor has grown cheaper relative to the universe
  • A decreasing ratio implies that the cheapest decile portfolio for a given factor has grown more expensive relative to the universe

This tool is not representative of any Alpha Architect ETFs. 

Universe Details

Source: FactSet. Data plotted from 1/1/1992 onward. 1/1/1992 is the earliest available start date for constituent data within the reference universe.   

The analysis to build the data works as follows:

  • Identify Region: e.g., US, EAFE
  • Identify Universe: e.g., Top 1500 stocks by market cap
  • Identify Valuation: e.g., Calculate valuation metric for all firms in the universe (e.g., EBIT/TEV, Earnings/Price)
  • Quantile Splits: e.g., Sort the 1500 stocks into 10 decile buckets, 150 stocks each, equal-weight, rebalance monthly
  • Calculate Median Valuation: For each quantile, calculate the median valuation metric
  • Plot the data

We create the following time series:

  • US Value= Top Decile Value (1)
  • US Glamour= Bottom Decile Glamour (10)
  • US Spread= US Value – US Universe
  • US Universe= Top 1500 stocks by market cap
  • EAFE Value= Top Decile Value (1)
  • EAFE Glamour= Bottom Decile Glamour (10)
  • EAFE Spread= EAFE Value – EAFE Universe
  • EAFE Universe= Top 1500 stocks by market cap
  • US Value Ratio= US Value / US Universe
  • EAFE Value Ratio= EAFE Value / EAFE Universe
Source: Factset. Important note on the data. We do not eliminate negative EBIT/EBITDA/Earnings/Cash Flow (i.e., money losers). This will potentially bias the glamour portfolios to look more expensive when prices are actually getting cheaper. For example, if a firm has an EBIT = -$10 and a TEV = $20, the EBIT/TEV = -.5, but if the TEV = $10, the EBIT/TEV = -1. This will affect the time series on the value minus glamour spreads. One way to fix this issue is to eliminate all money-losing firms, but now the glamour portfolio is biased to look less expensive than it really is. In the end, there is really no perfect solution. If you have any great ideas, please let us know.

Important Disclosures

Source: Data is provided by Factset and derived data are provided by Alpha Architect, which rely on data from Factset.
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