I get a good stream of comments and requests by current users of the OSV stock analysis spreadsheet to add certain valuation tools and metrics, but rather than just adding user requests, I like to make sure that it will really benefit and adds to fundamental analysis instead of just trying to pack as much features as possible.

One interesting valuation method that came up was designed by Jeremy Siegel from his book, Stocks the for Long Run.

As far as I know, there is no official name for the valuation method, and there is only one website that uses this method and has called it the O-Metrix score.

I’ll stick with the name. So let’s go through what it is, how it is used and my verdict on how useful I find it.

What is the O-Metrix Score?

You know about the Piostroki F Score, Altman Z Score and the Beneish M Score. All created by Professors based upon their intense research.

The O-Metrix score too was developed by a professor. Jeremy Siegel is a professor of Wharton School of Business, and describes the O-Metrix method as well as other in his book, Stocks for the Long Run.

The O-Metrix is based upon a combination of three metrics.

A rule of thumb for stock valuation that is found on Wall Street is to calculate the sum of the growth rate of a stock’s earnings plus its dividend yield and divide by its P-E ratio. The higher the ratio the better, and the famed money manager Peter Lynch recommends investors go for stocks with a ratio of two or higher, avoiding stocks with a ratio of one or less.

We all want to buy stocks with high growth, a dividend and low price and the following equation is supposed to be able to identify such stocks.

O-Metrix = (Dividend Yield + Earnings Growth) / PE Ratio

and if you are dividend income investor, more emphasis is required for dividends, so the dividend variation is referred to as the Double Dividend O-Metrix Score.

DD O-Metrix = (2 x Dividend Yield + Earnings Growth) / PE Ratio

Going back to that quote a little higher up; “Peter Lynch recommends investors go for stocks with a ratio of two or higher, avoiding stocks with a ratio of one or less”, the above two equations can be multiplied by 5 to make the scale range from 0 to 10 instead of betwen 0-1, which makes it easier to identify and classify stocks.

The equations now become:

O-Metrix = 5 x [(Dividend Yield + Earnings Growth) / PE Ratio]

DD O-Metrix = 5 x [(2 x Dividend Yield + Earnings Growth) / PE Ratio]

EFSInvestment has provided his grading system which I’ll go by.

[list]

10+ : A+ Grade Stock

8 to 10: A Grade Stock

6 to 8: B Grade Stock

4 to 6: C Grade Stock

2 to 4: D Grade Stock

0 to 2: F Grade Stock

About the author:

Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.

Visit Jae Jun's Website

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