---
description: "Buys stocks with high Book-to-Price ratios (cheap) and shorts stocks with low Book-to-Price ratios (expensive), exploiting the empirical value premium."
tags: [stocks, value]
---

# Value

**Section**: 3.3 | **Asset Class**: Stocks | **Type**: Value

## Overview
The value strategy follows the same long-winner/short-loser structure as momentum strategies, but the selection criterion is a value metric rather than past returns. The most common value metric is the Book-to-Price (B/P) ratio. Stocks with high B/P are considered "cheap" (value stocks) and tend to outperform; stocks with low B/P are "expensive" (growth stocks) and tend to underperform.

## Construction / Signal
The primary signal is the Book-to-Price ratio:

```
B/P = Book value per share outstanding / Current stock price
```

Note: the B/P ratio is equivalent to the Book-to-Market ratio where "Market" is market capitalization (price × shares outstanding) rather than total book value.

Stocks are sorted by B/P in descending order. A zero-cost (dollar-neutral) portfolio is constructed by buying top-decile stocks (high B/P, cheap) and shorting bottom-decile stocks (low B/P, expensive).

## Entry / Exit Rules
- **Entry**: Buy top-decile stocks by B/P; short bottom-decile stocks by B/P.
- **Exit**: Hold for 1–6 months; rebalance periodically as book values are updated (typically quarterly with earnings releases).
- **Portfolio**: Dollar-neutral long/short construction.

## Key Parameters
- **Value metric**: B/P ratio (Book-to-Price = Book-to-Market)
- **Holding period**: Typically 1–6 months
- **Price definition**: Asness, Moskowitz and Pedersen (2013) use current (most up-to-date) prices; Fama and French (1992) use prices contemporaneous with the book value

## Variations
- **Alternative value metrics**: Earnings-to-Price (E/P), Sales-to-Price, Cash Flow-to-Price, Dividend Yield
- **Price timing**: Current price vs. price at book value date changes the B/P ratio and can affect performance
- **Long-only**: Buy only top-decile value stocks

## Notes
- The value premium is a well-documented anomaly (Fama and French three-factor model).
- Value and momentum are empirically negatively correlated, making them natural complements in a multifactor portfolio (see Section 3.6).
- Holding period is typically 1–6 months.
- Book value data lags the market; stale book values can introduce noise.
- Value strategies can suffer extended drawdowns during "growth" regimes.