Tuesday, March 29, 2011

Corequity Valuation Model Results

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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