Cheap shares are often cheap for a reason. The Royal Bank of Scotland (LON:RBS) is a prime example - after being rescued by the government after the 2008 financial crash, the historic bank's shares have languished around 200p ever since.
While the evidence shows that maintaining a value strategy through boom and bust will be rewarded, the above chart shows that sticking with it is actually extraordinarily hard, and can test the most patient investor. 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:
- Price to Book Value
- Price to Earnings
- Price to Free Cash Flow
- Dividend Yield %
- Price to Sales
- Earnings Yield %
How does Royal Bank Of Scotland stack up?
Royal Bank Of Scotland's Value Rank
We can see by using Royal Bank Of Scotland’s StockReport that the group has a:
- Rolling price to book value of 0.59,
- Rolling price to earnings ratio of 8.78
- Trailing twelve-month price to free cash flow of
- Rolling dividend yield of 3.83%
- Trailing twelve-month price to sales ratio of 1.95
When we add all of these together, we find that Royal Bank Of Scotland has a Value Rank of 79. Investing in high-value stocks requires finesse and a sturdy constitution but, when cheap stocks come good, the payoff can be large and sudden.
Royal Bank Of Scotland’s Value Rank of 79 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.
A smarter way to invest in value stocks is to find the best quality value stocks or value stocks whose share prices are turning around - history shows that you can do much better than a passive investor by combining factors, so it makes sense to consider Royal Bank Of Scotland’s Value Rank alongside its Momentum and Quality Ranks. You can see these Ranks on the group's StockReport page.
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.