New York – A recent study by the independent research firm Ford Equity Research reveals that mid and large cap stocks might be a good “buy” opportunity in the current equity market environment given historical patterns that have been closely followed by the research firm for almost four decades. Small caps do not present the undervaluation of some mid and large caps, therefore their price-to-value ratios do not make them as attractive opportunities as mid and large caps.
Ford Equity Research, an alternative research provider founded in 1970, collects, compares, tests, and validates historical data on a universe of 4,400 companies. The firm calculates the price-to-value ratio for each one of the covered companies by dividing the stock price by the value derived from Ford’s proprietary intrinsic value model (which incorporates earnings, ratings, dividends, projected growth rates, and prevailing interest rates). The average of these ratios is what Ford calls Average Price to Value Ratio (PVA), and it provides an idea of the overall market valuation.
According to Ford’s study, “a PVA greater than 1.0 indicates that a company is overpriced while a value of less than 1.0 implies that a stock is trading below its intrinsic value.”
In a series of graphs, Ford’s study shows the flow of the PVA from January 1975 to January 2009. During this period, PVA ratios equal-to or below 1.0 have been good buying opportunities given the subsequent market recovery.
“PVA has dropped below 1.0 seven previous times – April 1973, April 1976, September 1990, August 1993, August 1998, and June 2002. In each of these cases, the market made an initial low within the first 3 months. However, the recovery from these lows was frequently impressive, with gains that averaged 18% and 34% over the following 12 and 24 months, respectively.”
One caveat, however, must be kept in mind. Ford’s study indicates that an exception to the trend described above occurred in 1973 when the market rushed back up before declining another 39% over the next 18 months. It is well known that every rule has an exception, and this exception is worthy of consideration. Nevertheless, the current average PVA of less than 1.0 may be presenting an opportunity similar to the seven ones described in the study.
The report analyzes separately PVA ratios for large, mid, and small caps. While large and mid caps appear undervalued, small caps have not reached similar levels, occasionally reaching overvalued levels. Therefore, small caps currently present the riskiest stocks, according to Ford’s report.