Value Spread Closes – What It Means | The Acquirer's Multiple®

During their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discussed Value Spread Closes – What It Means. Here’s an excerpt from the episode:

Tobias: I know that everybody likes the value spread update. So, the value spread came crashing in from May to June, end May to end June. This is the alpha architect one that they measure. It looks to me like there might be a little data area in there. I haven’t said this to the guys, but it’s come in so much and I don’t think that the underlying– [crosstalk]

Jake: I was going to ask, is it been the fundamentals or the price that has changed to cause this tightening?

Tobias: June was pretty good for value, and half of July has been pretty good for value. But not to the extent that– If you look at it, it looks like it’s come in a 2000 or a 2009 type move, which you would have felt, I’m pretty sure.

Jake: When you’re looking at it every day like you are. [laughs]

Tobias: I would have felt it. I can tell you that.

Jake: Yeah.

Tobias: You probably would have heard me from Sacramento.

Bill: Well, you could have earnings roll over, and then the multiple goes up.

Tobias: Right, and the reverse. Yeah.

Jake: [laughs] A bunch of banks in there getting squeezed by net interest margin and earnings evaporating.

Tobias: Maybe it’s the energy. I don’t know.

Bill: But that wouldn’t come through yet, I don’t think. That’s the one– [crosstalk]

Jake: Yeah, they are just starting to report it out.

Bill: I’d be interested to see after this quarter.

Tobias: The banks do seem to be doing pretty well, I think.

Bill: Let’s just see over the past year. I’ve got QVAL up here against the SPY and the Qs. Past 12 months, the Qs have done 37%, QVAL has done 18%.

Jake: That’s pretty good.

Tobias: It’s not against the Qs, because the value spread in this one is against– [crosstalk]

Bill: Oh, yeah, [crosstalk] thought me how they do this.

Tobias: It’s the median stock.

Jake: Median.

Tobias: It’s the 1,500 largest stock. So, it’s the median stock, which is the 750th stock, and then it’s the median stock of the value decile. So, the value decile is 10%.

Jake: 75th cheapest.

Tobias: Yeah.

Bill: Yeah, that’s right. I forgot that. I totally forgot that.

Tobias: So, it’s 75 versus 750. I don’t know how– [crosstalk]

Bill: Even if you do, quality, like, QVAL has done 20%, quality has done 25%, the Qs have done 37%, the SPYs have done exactly what QVAL has done, more or less. I don’t know, hard to see how the spreads come in. But what do I know? Nothing.

Tobias: Yeah, index against– Yeah, I don’t know. But the index then against SPY is not that– SPY, it’s the 1,500, not the 500. And the 500 has been heavily concentrated in Magnificent 7, or whatever we’re calling– [crosstalk]

Jake: Yeah, six, whatever it is. Those guys have carried all the weight, haven’t they?

Bill: Yeah.

Tobias: I certainly think it’s that the smaller the stock, the worse it’s done, although it does seem to– Maybe it’s turned a little bit recently. I don’t know.

Bill: Rhymes with what I’m seeing.

Tobias: When I say recently, I mean, probably since Monday.

Jake: [laughs]

Tobias: Rallies are very short.

Jake: Yeah, these are reverse Musk gears.

Tobias: Yeah, that’s right.

Jake: [laughs]

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