Exploring the growth value equity valuation model with data visualization

Abstract

Abstract The Growth Value Model (GVM) proposed theoretical closed form formulas consisting of Return on Equity (ROE) and the Price-to-Book value ratio (P/B) for fair stock prices and expected rates of return. Although regression analysis can be employed to verify these theoretical closed form formulas, they cannot be explored by classical quintile or decile sorting approaches with intuition due to the essence of multi-factors and dynamical processes. This article uses visualization techniques to help intuitively explore GVM. The discerning findings and contributions of this paper is that we put forward the concept of the smart frontier, which can be regarded as the reasonable lower limit of P/B at a specific ROE by exploring fair P/B with ROE-P/B 2D dynamical process visualization. The coefficients in the formula can be determined by the quantile regression analysis with market data. The moving paths of the ROE and P/B in the current quarter and the subsequent quarters show that the portfolios at the lower right of the curve approaches this curve and stagnates here after the portfolios are formed. Furthermore, exploring expected rates of return with ROE-P/B-Return 3D dynamical process visualization, the results show that the data outside of the lower right edge of the “smart frontier” has positive quarterly return rates not only in the t + 1 quarter but also in the t + 2 quarter. The farther away the data in the t quarter is from the “smart frontier”, the larger the return rates in the t + 1 and t + 2 quarter.

Keywords

• Data visualization
• Stock prices
• Rates of return
• Return on equity
• Price-to-book value ratio