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Testing Benjamin Graham Out of Sample

Does old-fashioned value investing still work? In their recent paper entitled “Testing Benjamin Graham’s Net Current Asset Value Strategy”, Ying Xiao and Glen Arnold test Benjamin Graham’s approach to valuation based on net current asset value to market value (NCAV/MV) to see whether it outperforms in a modern market environment. NCAV is current assets minus all current and long-term liabilities, divided by the number of shares outstanding. The strategy assumes that a stock is substantially undervalued when NCAV/MV is 1.5 or greater. Using accounting and return data for stocks listed on the London Stock Exchange during 1980-2005, they find that: Keep Reading

Shark Attacks?

Do some short sellers employ sharp intraday attacks on targeted stocks to trigger temporary plunges, during which they cover at a profit? In the March 2007 draft of his paper entitled “Predatory Short Selling”, Andriy Shkilko examines empirical evidence of such behavior. Using all trades and quotes in Nasdaq-listed stocks during regular trading hours from April 2005 to April 2006, he identifies 1,482 potential predatory attacks and concludes that: Keep Reading

The Ignored-by-the-MSM (Information Risk) Premium?

How does main-stream media (MSM) coverage of companies relate to returns on their stocks? Does coverage reduce risk by disseminating information? In their February 2007 paper entitled “Media Coverage and the Cross-Section of Stock Returns”, Lily Fang and Joel Peress examine how media coverage (Wall Street Journal, New York Times, USA Today and Washington Post) relates to stock returns. Using article counts and other data (on trading, accounting, analyst coverage and ownership) for all NYSE-lilsted companies and 500 randomly selected Nasdaq-listed companies over the period 1993-2002, they find that: Keep Reading

Hedge Fund Stock Picking and Trade Timing

Are hedge fund managers the best and brightest when it comes to stock picking and market timing? In their March 2007 paper entitled “How Smart are the Smart Guys? A Unique View from Hedge Fund Stock Holdings”, John Griffin and Jin Xu investigate whether hedge fund managers are better at picking stocks and investing styles than mutual fund managers. Using the stock holdings of 306 hedge fund companies from 1980 to 2004 as reported in quarterly SEC Form 13F equity filings, they conclude that: Keep Reading

The Buyback Indicator Still Going Strong?

Are stock buybacks still good indicators of future strong returns, or have investors driven this anomaly from the market? If they still work, why? In their January 2007 paper entitled “The Nature and Persistence of Buyback Anomalies”, Urs Peyer and Theo Vermaelen investigate whether market recognition has eliminated or attenuated the stock repurchase anomaly. Using a sample of 3,481 repurchase announcements spanning 1991-2001, they find that: Keep Reading

Whose Sentiment Matters, and for What Horizon?

Is sentiment a useful trading indicator? In their December 2006 paper entitled “On the Predictive Power of Sentiment: Why Institutional Investors Are Worth Their Pay”, Bernhard Zwergel and Christian Klein measure the forecasting abilities of institutional and private investors and test out of sample a related trading strategy. Their source data comes from the sentix weekly sentiment survey, asking as many as 700 investors (25% institutional and 75% private investors) about the future one-month (short term) and six-month (medium term) directions of ten stock markets. Using this data for six of these markets over the period 2/23/01-2/2/06, they conclude that: Keep Reading

Enhancing the Value Premium Via P/E Analysis

Reader Richard Beddard, editor of Interactive Investor, flagged a series of three studies by Keith Anderson and Chris Brooks on approaches to enhancing the value premium via empirical analysis of the price-earnings ratio (P/E) calculated with lagged earnings. One study seeks to optimize value indication based on the extent and weighting of historical earnings used in the P/E calculation. The second study seeks to concentrate the value premium by decomposing P/E into components related to market, firm size, industry and company-specific factors. The third study combines the findings of the first two and examines the returns for the extreme tails of the enhanced P/E distribution. All three studies use earnings and stock return data for a broad range of UK companies (excluding the smallest) for the period 1975-2004. Summaries of the three studies follow. Keep Reading

The Stock Supply Cycle

Does the business cycle beget a stock supply cycle? In their January 2007 paper entitled “Corporate Event Waves”, Raghavendra Rau and Aris Stouraitis examine the relationships among five different kinds of stock supply additions and subtractions: initial public offerings (IPO); seasoned equity offerings (SEO); stock-financed acquisitions; cash-financed acquisitions; and, stock repurchases. Using data for 151,000 U.S. corporate stock supply transactions during the period 1980-2004, they conclude that: Keep Reading

Herb Greenberg: The Short Circuit?

Original Historical Analysis –   Update: Out-of-Sample Test


In this entry, we calibrate Herb Greenberg’s stock commentary on MarketWatch. In general, Herb Greenberg provides negative/skeptical comments on specific stocks. His sources are often anonymous and may already have shorted stocks he mentions. In his own words, his “…column does not make recommendations; it points out risks or situations that are otherwise overlooked. It’s then up to readers to decide whether to sell the stock (if they own it), avoid it (if they’re considering owning it), ignore what I’ve written or, if they’re so inclined, make a negative bet on a company.” For this analysis, we catalog 318 distinct negative mentions involving 99 different stocks over the period 4/12/04 (when he joined MarketWatch) through 6/15/05. Here’s what we find… Keep Reading

Institutional Herding and the Value Premium

What causes the value premium, a rational risk factor or an irrational overreaction? If the latter, who overreacts and to what? In his February 2007 paper entitled “Institutional Investors, Intangible Information and the Book-to-Market Effect”, Hao Jiang investigates a connection between the value premium and the trading behavior of institutional investors. Specifically, he tests whether institutions overreact to intangible information (that not derived directly from firm accounting measures). Using data on returns, accounting fundamentals and institutional ownership encompassing 49,164 firm-years over the period 1981-2004, he concludes that: Keep Reading

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