Value Stock Analysis

Value investing is an investment strategy that involves picking stocks that seem to be trading for less than their intrinsic or book value. Value investors are active in seeking out stocks that they think the stock market is underestimating. The common belief among value investors is that the market tends to overreact to good and bad news, resulting in stock price movements that do not correspond to a company's long-term fundamentals. Such an overreaction offers an opportunity to profit by buying stocks at lower price. There are many ways that value stock investors determine the valuation of the stocks, but some of the most common are price to book and price to earnings ratios, free cash flows, and the analysis of debt, equity, sales, and revenue growth.

Vanguard Value ETF (VTV) is a notable ETF in the space of value investing. This ETF seeks to track the performance of the CRSP US Large Cap Value Index, which measures the investment return of large-capitalization value stocks. VTV is a convenient way to match the performance of many of the largest value stocks in the nation. Also its expense ratio is just 0.4%. VTV is a passively managed fund like SPY.

VTV returns' mean and standard deviation are 0.62 and 4.944 respectively, while the mean for the market risk premium is 0.84 and the standard deviation is 4.288. VTV's highest monthly Sharpe ratio from February 2004 to July 2021 is 3.22 and its highest annual Sharpe for the same time period is 11.15. Using the CAPM, VTV's beta is 1.02 and its alpha is -0.24. Beta is statistically significant, but alpha is not because the p-value is greater than alpha. Lastly, using VTV's factor loadings for reference, SMB had a beta of 0.44 and is statistically significant, HML had a beta of 0.70 and is statistically significant, and RF had a beta of -1.38 and is not statistically significant, and finally alpha was 0.84 and was statistically significant. To determine if values are statistically significant we must look at the t-stat and p-value. If the p-value is lower than the alpha or beta values then the alpha or beta is considered statistically significant. Upon review of these numbers I do not recommend VTV because it does not get better returns nor have a smaller standard deviation than the market risk premium and the alpha was not statistically significant of VTV.

BRK-A returns' mean and standard deviation are 1.26 and 5.86 respectively. The mean and standard deviation for the market risk premium are 0.77 and 4.36 respectively. BRK-A's monthly Sharpe ratio is 0.21 and the annual Sharpe is 0.74. Using the CAPM, BRK-A's beta is 0.596 and its alpha is 0.780, both of these values are statistically significant. Lastly, using the same factor loadings as before, but with BRK-A this time, HML and RF betas and alpha are statistically significant according to the 3-factor model, however SMB's beta is not. To determine whether the values were statistically significant I used the same parameters as the previous paragraph. I will continue to use these parameters in the following paragraphs as well to determine if values are statistically significant. With this information I would be much more comfortable recommending you to invest in BRK-A than VTV.

Now, I will look at the BRK-A values in sections of months. The first section is May, 1990 to February, 2000. The mean and standard deviation for BRK-A is 1.81 and 7.15 respectively. The mean of the market risk premium is 1.13 and the standard deviation is 3.96. The monthly Sharpe is 0.25 and the annual Sharpe is 0.87. When using the CAPM, BRK-A'a alpha is 0.96 and beta is 0.75, both values are statistically significant. Using the 3-factor model all of the betas are not statistically significant, but the alpha is. Investing in BRK-A during this section would have been the proper decision.

The next section is March, 2000 to February, 2009. The mean and standard deviation for BRK-A is 0.64 and 5.49 respectively. The mean of the market risk premium is -0.57 and the standard deviation is 4.68. The monthly Sharpe is 0.12 and the annual Sharpe is 0.40. BRK-A's alpha and beta according to the CAPM during this time period were 0.852 and 0.376 respectively, and both values are statistically significant. Finally, using the 3-factor model only HML and RF had statistically significant betas, otherwise SMB and alpha were not statistically significant. This data leads me to believe that investing in BRK-A during this time period would have also been a successful move.

The final time period I will look at is March, 2009 to February, 2020. The mean and standard deviation for BRK-A is 1.21 and 4.48 respectively. The mean of the market risk premium is 1.28 and the standard deviation is 3.91. The monthly Sharpe is 0.27 and the annual Sharpe is 0.93. Using the CAPM, alpha and beta for BRK-A are 0.417 and 0.618 respectively, and both values are considered to be statistically significant. Lastly, using the 3-factor model only HML beta and alpha are statistically significant, SMB and RF betas are not. According to this time period I am a little more hesitant to say investing in this time period would have been better than other options considering the market risk premium outperformed BRK-A with a statistically significant alpha and beta.

Based on all of the analysis above, I would recommend investing in BRK-A because it seems to always have a good return and standard deviation and when using the CAPM the alpha and beta remain statistically significant meaning our CAPM model has little variation from what actually occurs. However, I would not recommend investing in VTV.