Value vs Quality: More Correlated than Ever?


March 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • P/E and ROE long-short factors have become highly correlated
  • During certain periods investors favor expensive and unprofitable stocks
  • However, it is difficult explaining the positive correlation outside of bubbles


The older I get, the less I seem to know for certain about investing. The confidence in my knowledge has been steadily eroded over the years and much of the curriculum taught at university has been discarded. CAPM – taxes are real and investors are not rational. WACC – use 10% instead, regardless of the capital structure and industry. Higher risk equates to higher returns – not when considering low-volatility stocks.

It is frustrating to learn that investing is more gray than black and white. I long for a solid framework, but instead am dealing with a house with wandering rooms in an earthquake zone.

Most recently I was surprised to see that the price-to-earnings and return-on-equity factors are highly positively correlated.

C’mon! This can’t be correct, which we will hopefully disprove in this research article.


We use long-term data from Jensen, Kelly, and Pedersen (JKP) that is publicly available via the Global Factor Data website. The database is a great resource as it provides the time series for more than 100 factors for 93 countries with different weighting schemes, which is a delight for financial researchers.

We focus on seven value and five quality metrics in the U.S. stock market, where we calculate the correlations of these using daily returns of capped value weighted, long-short indices from 1951 to 2022. We observe that broadly speaking the value metrics are more positively correlated than the quality metrics, which is expected as enterprise value (EV)-to-EBITDA is closer related to price-to-earnings (P/E) than debt-to-equity to earnings volatility (read Quality Factor: How To Define It?).

However, we also observe that P/E features a 0.61 correlation to return-on-equity (ROE)