Relative Valuation for Value Investing: Theoretical Aspects and Empirical Evidence

Abstract

This thesis explores various methods of valuation applied within the context of value investing in the equity market. After introducing the concept of valuation, exploring both the endogenous and exogenous assumptions on which it is based, and illustrating its potential applications in financial contexts, the first chapter delves into two complementary approaches: absolute valuation and relative valuation. A comprehensive discussion on the assumptions, strengths, weaknesses, and common characteristics of both approaches is presented. The second chapter narrows its focus to relative valuation, with particular reference to multiples. Having introduced the balance sheet items involved in calculating the main multiples, the attention is then directed to the assumptions, difficulties, and advantages inherent in their calculation. Emphasis is placed on three specific multiples, highlighting the type of companies to which they are most consistently applied, along with critical points and calculation discrepancies. The last part involves an empirical analysis focused on the selection and examination of value ETFs portfolios in recent years. This includes adopting well-known performance indicators from the literature and among practitioners to understand the robustness and profitability of this type of investment.