Demystifying Multiple Valuation Models

"Multiple valuation," a popular stock selection technique, is defined as a weighted average of stock selection "models" or "factors." It forms the fundamental basis of many modern approaches to active equity management. Multiple valuation is an automated and more sophisticated version of the stock "screens" performed by traditional investment managers. A multiple valuation may consist, for example, of an equally weighted average of a stock's earnings growth rate, a measure of earnings momentum and a dividend discount model (DDM) alpha. Each factor may be on a different scale. A simple approach for dealing with this scaling issue is to compute factor value rankings and apply weightings in accordance with each factor's presumed relative importance. The end result is a set of values that may serve as a multiple valuation of the security's attractiveness