This piece highlights the finest Qi Value investment approach stock concepts for 2023 (updated as of June 2023). It provides insights on enhancing the strategy and precisely how to integrate it into your portfolio.

First, let's lay some groundwork.

Why Embrace Composite Ratios?

At Quant Investing, we are proponents of blending various ratios to identify undervalued companies. This aids in identifying undervalued companies from different perspectives, such as based on earnings and cash flow.

The first such indicator we discussed was Value Composite One (included in the screener) developed by James O'Shaughnessy. The issue with the Value Composite One indicator is that it incorporates the Price to Book ratio. 

We are not opposed to utilizing the price to book ratio to identify undervalued companies (it works best after significant corrections), but the problem is it underperforms the market over extended periods of time.

Addressing the Price to Book Predicament

To overcome this obstacle, we formulated our own composite valuation indicator called Qi Value. 

Not only does it exclude the Price to Book ratio, it also incorporates all the top valuation ratios we've tested, including findings from the research paper “Quantitative Value Investing in Europe: What Works for Achieving Alpha.”

Qi Value ranks the entire universe of companies (approximately 22,000) in the Quant Investing stock screener using four valuation ratios. This facilitates the identification of the most undervalued companies from various perspectives.

How is Qi Value determined?

Qi Value is calculated using the following ratios:

EBITDA Yield

Calculated as: Earnings before interest, taxes, depreciation, and amortization (EBITDA) / Enterprise Value

Earnings Yield

Computed as Operating Income or earnings before interest and taxes (EBIT) / Enterprise Value (Read more about earnings yield here: A simple ratio beats the world’s best value funds)

FCF Yield

FCF (Free cash flow) Yield is calculated as Free Cash Flow / Enterprise Value – here, free cash flow equals cash from operations minus capital expenditure

Liquidity (Q.i.)   

Liquidity (Q.i) is ascertained by Adjusted Profits / Yearly trading value.

It provides an indication of how high a company’s yearly traded value per share is in comparison to its profits. A high value implies low traded value compared to profits, and thus a greater likelihood of the company’s shares being incorrectly priced.

A low value means high traded value to profits which, most likely, means more analysts follow the company, yielding a lesser chance that it may be mispriced.

It aids in identifying companies with substantial controlling shareholders or a stable shareholder base where traded value is low, and thus less analyst interest due to an inability to profitably trade the company’s shares.

In the subsequent article, you can read about our back test of Qi Liquidity: This overlooked ratio, large funds, and hedge funds can’t use, gives you higher returns

To commence utilizing Qi Value in your portfolio now – Click here 

+1223% return over 21 years

When we evaluated the Qi Value investment approach in 2015 (and I began employing it in my personal portfolio), I never expected it to perform so well. 

Over the nearly 22-year period from May 2001 to December 2022, we tested the Qi Value investment approach in developed markets globally, and it yielded an impressive 1223.0%!

This is 8.3 times the 148.1% the market (MSCI World Index) delivered over the same period.

Results of the evaluation

In 2015, we assessed Qi Value against the market and six other investment strategies over the 14-year period from April 2001 to February 2015.

The following table summarizes the results:

We evaluated the Qi Value indicator against:

• Earnings Yield (EY) = Earnings Before Earnings and Taxes / Enterprise Value
• Price to Free Cash Flow (P/FCF)
• Price to Earnings (PE)
• Earnings before interest, taxes, depreciation, and amortization / Enterprise value (EBITDA Yield)
• Price to Sales (PS)
• Price to Book (BP)

Qi Value leads the pack

As evident, Qi Value outperformed all other ratios, except for the average return of the Price to Sales ratio. 

In addition to that, Qi Value showcased:

• The highest total return +477.6%
• The highest compound annual growth rate over 14 years
• The lowest standard deviation, indicating less volatility in Qi Value returns compared to other ratios
• The highest Sharpe ratio (higher is better), signifying superior risk-adjusted returns. Here is the Sharpe ratio definition.

What about 2016 to 2022?

Following the conclusions of the evaluation, we have continued monitoring Qi Value's performance to uphold the validity of our assessment. 

Here are the updated results: