Corequity is an equity valuation model which takes into account the normalized earnings, the derived reinvestment return plus yield, and the history of relative valuation to project a Valuation return or risk as a percentage change in price.
The current universe is just over 500 publicly traded US equities.
This equity universe has been valued monthly for over 6 years and the results were screened for the best and worst values. Their relative performance in the subsequent month was calculated and their indices are shown below.*
The average Undervalued stock has outperformed our universe by 468 basis points per annum while the Overvalued average underperformed by 340 basis points pa. The resulting spread is 8.1% per annum in favor of the Undervalued over the 6 1/4 year period.
Even more pronounced, a subset of the Overvalued (comprising of 25% of the total) underperformed the universe by 1251 basis points per annum. In absolute terms, $1,000 invested in this group is worth $378 after 6 ¼ years suggesting a particularly good source of short candidates.
* Screens are based on top and bottom quartiles of E/M (Estimate/MPEPS, or smoothed earnings) and top and bottom two quartiles of VR, Valuation Return or Risk.
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