Fasten Your Value Belt: Growth Could Take You for a Wild Ride!

Abstract

We relate valuation multiples to fundamentals through a new framework. Starting with a standard Gordon dividend discount model and applying a Dupont decomposition, we investigate how changes in fundamentals affect pricing in the cross section of global equities. We find that changes in fundamentals affect value and growth companies in a different way; growth companies are more sensitive to net profit margins and growth expectations. Finally, we quantify the effect fundamentals might have in the style rotation from growth to value across different industry groups, given the challenges value investors have been faced with in the most recent past.

Keywords: Asset Pricing, Value Investing, Global Equity Markets, Fundamental Analysis, Valuation, Style Rotation

JEL Classification: G11, G12, G15