Value Investing 2.0: Why “The Acquirer’s Multiple” Beats P/E Ratio
Value Investing 2.0: Why “The Acquirer’s Multiple” Beats P/E Ratio
EXECUTIVE SUMMARY
- The Trap: Traditional Price-to-Earnings (P/E) ratios are misleading. They ignore debt. A company with a low P/E might be “cheap” only because it is drowning in debt (a Value Trap).
- The Solution: The Acquirer’s Multiple (EV/EBIT) measures the true cost to buy the entire company (Enterprise Value) relative to its operating profit (EBIT). It treats stock picking like buying a private business.
- The Strategy: “Deep Value” investing involves systematically buying the cheapest, ugliest stocks based on this metric. It is psychologically painful but mathematically superior to buying popular growth stocks.
Warren Buffett famously said, “Price is what you pay, value is what you get.” But most investors measure price incorrectly. If you buy a house for $100k but assume a $900k mortgage, the price isn’t $100k; it’s $1M. Value Investing 2.0 moves beyond the simple P/E ratio used by amateurs. It utilizes Enterprise Value (EV) to expose the hidden debt load of “cheap” stocks and identify the true bargains that Wall Street has left for dead. According to Team BMT Analysis, this is the most robust way to capture the Value Factor premium. Source: The Acquirer’s Multiple (Tobias Carlisle)
Scenario: Company A and Company B both have $10/share earnings. Stock Price $100. (P/E = 10).
- Company A (Debt Heavy): Market Cap $1B. Debt $2B. Cash $0.
Enterprise Value: $3B.
Real Cost: You are paying 3x more than it looks. - Company B (Cash Rich): Market Cap $1B. Debt $0. Cash $500M.
Enterprise Value: $0.5B.
Real Cost: You are getting a massive discount because the cash offsets the price. - Verdict: P/E says they are equal. The Acquirer’s Multiple proves Company B is 6x cheaper.
Backtest Performance (1973-2017)
| Strategy | Annualized Return (%) |
|---|---|
| S&P 500 (Market) | 10.5 |
| Acquirer’s Multiple (Deep Value) | 17.9 |
*Chart Note: Systematically buying the cheapest stocks (EV/EBIT) outperformed the market by over 7% annually over 44 years.
CRITICAL SCENARIO: The “Value Trap” Defense
Avoiding bankruptcy risks.
| Condition | Low P/E Investor | Deep Value (EV/EBIT) Investor |
|---|---|---|
| Company with High Debt | Buys (Looks Cheap) | Avoids (EV is High) |
| Company with High Cash | Ignores (P/E is Average) | Buys (EV is Low) |
| Verdict | High Bankruptcy Risk | Balance Sheet Protection |
Execution Protocol
You don’t need a spreadsheet. ETFs like QVAL (Alpha Architect US Quantitative Value) or DEEP (Roundhill Acquirers Deep Value) implement this exact strategy automatically. They buy the top 40-50 cheapest stocks based on EV/EBIT.
Deep Value works best in Small Caps. Large companies (like Apple or Microsoft) are rarely mispriced. The true bargains are found in the ignored, boring, or “ugly” small companies. Combine this with the Small-Cap Value Premium (#396).
Deep Value stocks often have “hair on them” (lawsuits, bad earnings, scandals). That’s why they are cheap. You must be willing to hold a portfolio of companies that everyone else hates. If it feels comfortable, you aren’t doing it right.
Fail Condition: Selling during a period where Growth stocks are skyrocketing (FOMO). Value requires patience.
WEALTH STRATEGY DIRECTIVE
- Do This: Use EV/EBITDA or EV/EBIT instead of P/E ratio when evaluating individual stocks. It is the professional standard for valuation.
- Avoid This: “Cigar Butt” investing (buying dying companies) without a quality filter. Ensure the company has positive operating cash flow. Cheap junk is still junk.
Frequently Asked Questions
Is this the same as Warren Buffett?
It’s what Buffett used to do in the 1950s (Ben Graham style). Today, Buffett buys “Quality at a Fair Price.” Deep Value is “Fair Quality at a Wonderful Price.” It produces higher returns for smaller investors who don’t have billions to deploy.
What about Price-to-Book (P/B)?
P/B is outdated for the modern economy because it ignores intangible assets (IP, Brand, Software). EV/EBIT is superior because it focuses on Earnings Power relative to price.
Ticker symbols?
QVAL (US Deep Value), IVAL (International Deep Value), AVUV (Small Cap Value with Profitability filter).