Abstract
This paper illustrates the use of equity P/E factor models to analyze a traditional value portfolio and shows that -- despite the strategy’s focus on price -- systematically tilting toward stocks with low price-to-book can result in a portfolio with:1) Expensive bets on industry growth hidden by traditional active weight analysis;2) Low weight in inexpensive sources of intrinsic equity value;3) Potentially costly bets on firm-specific growth.The analysis suggests there exist numerous opportunities for managers to outperform a simple value-tilt benchmark by identifying those industries, business characteristics, and specific firms that represent the best value relative to their prevailing market prices.
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