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Firm Sales Seasonality as Stock Return Predictor

Posted in Animal Spirits, Calendar Effects, Fundamental Valuation

Do firms with predictable sales seasonality continually "surprise" investors with good high season (bad low season) sales and thereby have predictable stock return patterns? In their May 2018 paper entitled "When Low Beats High: Riding the Sales Seasonality Premium", Gustavo Grullon, Yamil Kaba and Alexander Nuñez investigate firm sales seasonality as a stock return predictor. Specifically, for each quarter, after excluding negative and zero sales observations, they divide quarterly sales by annual sales for that year. To mitigate impact of outliers, they then average same-quarter ratios over the past two years. They then each month:

  1. Use the most recent average same-quarter, two-year sales ratio to predict the ratio for next quarter for each firm.
  2. Rank firms into tenths (deciles) based on predicted sales ratios.
  3. Form a hedge portfolio that is long (short) the market capitalization-weighted stocks of firms in the decile with the lowest (highest) predicted sales ratios.

Their hypothesis is that investors undervalue (overvalue) stocks experiencing seasonally low (high) sales. They measure portfolio monthly raw average returns and four alphas based on 1-factor (market), 3-factor (market, size, book-to-market), 4-factor (adding momentum to the 3-factor model) and 5-factor (adding profitability and investment to the 3-factor model) models of stock returns. Using data for a broad sample of non-financial U.S common stocks during January 1970 through December 2016, they find that:

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