Here's why how cheap or expensive shares in large cap Integrated Mining operator Rio Tinto (LON:RIO) matters.
Stacks of academic research covering different time frames and regions of the world all come to the same conclusion: over time and on average, cheap stocks outperform expensive stocks.
This sounds so glaringly simple and obvious. So, how come we're not all rich?
The fact is cheap shares are often cheap for a reason. They can look unappetising. And, while the evidence shows that maintaining a value strategy through boom and bust will be rewarded, sticking with it is actually extraordinarily hard. Yet the evidence is so compelling that value is one of Stockopedia's three main factors in investment returns.
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 showed that composite value factors based on a mix of metrics dramatically beat the market over a multi-decade period.
It was from this robust insight that Stockopedia’s Value Rank was born, its synergy coming from the following simple valuation ratios:
How does Rio Tinto stack up?
Rio Tinto's Value Rank
We can see by using Rio Tinto’s Stock Report that the group has a:
When we add all of these together, we find that Rio Tinto (LON:RIO) has a Value Rank of 80. Investing in high-value stocks requires finesse and a sturdy constitution but, when cheap stocks come good, the payoff can be large and sudden.
Rio Tinto’s Value Rank of 80 puts it in the cheapest quartile of the stock market. That is certainly a promising jumping off point for our analysis but it is not the whole story.
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 Rio Tinto (LON:RIO) is to these three factors. We go into greater detail on factor investing in this video.
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.