Josh Payne and the folks at Quantopian ran some tests on the performance of the acquirer’s multiple and Joel Greenblatt’s Magic Formula.
I have argued in Deep Value and Quantitative Value that the acquirer’s multiple (enterprise value / operating earnings) tends to outperform the better known Magic Formula although it is only one-half of the Magic Formula, which also includes return on invested capital. Josh and Quantopian wanted to test that idea in the Quantopian backtester.
They tested a few variations of operating earnings, including EBIT, EBITDA, and EBITDA – Cap Ex. The results were recorded in their notebook, which you can view on the site by clicking here and finding the red “View Notebook” button to the bottom right of the first screen. Here are some of the backtest results:
After optimizing the results, Josh and Quantopian conclude:
Taking a look at the Cumulative Returns, Sharpe Ratios, Max Drawdown, Calmar Ratios, Annual Returns, and Annual Volatility we see that the Acquirer’s Multiple beats the Magic Formula in almost every category except drawdown and annual volatility. However, given the Sharpe ratio and Calmar ratio, it seems that the volatility and drawdown is for good measure.
In short, Magic Formula has slightly better performance with defensive metrics like volatility and drawdawn, but the superior returns that the Acquirer’s Multiple provides proves to be worth it, as encapsulated in metrics like Sharpe Ratio and Calmar Ratio.
Simpler, it seems, really is better in this case.
Quantopian has a really cool feature: You can grab the source code for the acquirer’s multiple backtest and run variations of it using Quantopian’s backtest data, or test your own ideas. Check it out here.
You can also check out the top acquirer’s multiple stocks in the largest 1000 names for free on the acquirer’s multiple site.
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