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Intrinsic Value: A Solution to the Declining Performance of Value Strategies

Author

Listed:
  • Derek Bergen

    (The Applied Finance Group, Ltd.)

  • Francesco A. Franzoni

    (Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

  • Daniel Obrycki

    (The Applied Finance Group, Ltd.)

  • Rafael Resendes

    (The Applied Finance Group, Ltd.)

Abstract

The paper proposes to use intrinsic value as an alternative measure of fundamentals in predicting stock returns. We construct intrinsic value as the sum of the book value of equity and the present value of future economic profits. The CAPM alpha of a long-short portfolio of large stocks based on the intrinsic-value-to-market ratio is 56 bps per month between 1999 and 2023 when the book-to-market ratio and similarly constructed price multiples fail to predict returns. Given the low turnover of the strategy, accounting for transaction costs has a marginal impact on its net alpha. We argue that the underperformance of strategies based on traditional valuation multiples stems from their failure to model future economic profits, which matter the most in low discount rate environments.

Suggested Citation

  • Derek Bergen & Francesco A. Franzoni & Daniel Obrycki & Rafael Resendes, 2024. "Intrinsic Value: A Solution to the Declining Performance of Value Strategies," Swiss Finance Institute Research Paper Series 24-76, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2476
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4913068
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    More about this item

    Keywords

    Intrinsic Value; Valuation Ratios; Price Multiples; Valuation Models; Mispricing; Expected Returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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