It has long been understood that cheap stocks have a tendency to outperform expensive stocks in the stock market. While this is not true every single year, over almost every 3-year cycle in the stock market, cheap (or value) stocks outperform. This phenomenon has created the cult of 'Value Investing' born of the writings of Benjamin Graham and the amazing success of its arch proponent Warren Buffett.
On an extremely long-term, multi-decade view, value is perhaps the only filter through which to think about stocks. Of course, with average investors holding stocks for less than a year, plenty of other factors come into play during that timeframe. Nevertheless, when we are researching a stock, we can’t ignore whether it is cheap or expensive.
According to Stockopedia’s calculations, Ocado (LON:OCDO) is very expensive. Here's why.
Breaking down Ocado’s low Value Rank
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 shows that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.
It was from this powerful insight that Stockopedia’s Value Rank was born. We can see it in action. Ocado has a:
- Rolling price to book value of 9.17,
- A negative rolling price to earnings ratio ,
- Negative trailing twelve-month free cash flow of,
- No rolling dividend, and a
- Trailing twelve-month price to sales ratio of 4.48...
When compared to other stocks in the market, this makes for a Value Rank of just 11.
Studies indicate that combining factors such as Value, Quality and Momentum is a more effective way of outperforming the market over longer time frames. That's why we have constructed our StockReports to give an instant impression of how well exposed Ocado is to these three factors.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.