Here’s A Pitfall For Value Investors Focused On Price-To-Book

Value investors place their faith in several operating metrics such as earnings and EBITDA, as much as the traditional price-to-book. In 2016, price-to-book has outperformed others, particularly in small cap stocks, according to Chris Meredith of O’Shaughnessy Asset Management. But price-to-book requires careful consideration and contains a “distortion,” that can lead to poor stock picks, he warned in a note.

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“…there are structural challenges to the factor and, before using it, investors need to be made aware of the embedded noise from repurchases that could be misleading,” he said in a note last month.

Meredith shines a light on shareholder transactions, and considers them key to real value. A moderate...