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Fundamental Valuation

What fundamental measures of business success best indicate the value of individual stocks and the aggregate stock market? How can investors apply these measures to estimate valuations and identify misvaluations? These blog entries address valuation based on accounting fundamentals, including the conventional value premium.

A Play on ETF NAVs?

A reader asked: “Does buying Exchange-Traded Funds (ETF) currently trading below Net Asset Value (NAV) provide a real advantage in the long run? In other words, are they ‘bound’ to reach NAV at some point? Does buying a fund which is trading at a discount to NAV and shorting a fund within the same sector that is trading at a premium to NAV make sense?” Keep Reading

Tobin’s q as a Stock Return Predictor?

A reader asked: “I was wondering if you can weigh in on Tobin’s q as a predictor of stock returns.” Keep Reading

Haugen’s Closed Case

What fundamental and technical factors are optimum for stock selection, and how well do they work? In the October 2008 draft of their paper entitled “Case Closed”, flagged by a reader, Robert Haugen and Nardin Baker present a model of future stock returns based on multiple regressions of 12 factors they find most significant in predicting monthly returns. Using monthly data for a sample of U.S. stocks over the 45-year period 1963-2007, they conclude that: Keep Reading

Combining Value and Earnings Surprise

Do earnings surprises work differently for value and growth stocks? If so, can investors exploit the difference? In the September 2009 draft of their paper entitled “When Two Anomalies meet: Post-Earnings Announcement Drift and Value-Glamour Anomaly”, Zhipeng Yan and Yan Zhao investigate the combined effects of the value premium and the post-earnings announcement drift anomaly. They first sort stocks into quintiles according to some measure of value (book-to-market ratio, earnings-to-price ratio, cash-flow-to-price ratio or three-year average sales growth) and then allocate firms within these quintiles to six categories according to sign of the most recent quarterly earnings surprise (+/-/0) and the direction of the most recent earnings announcement abnormal return (+/-). Using stock price, earnings estimate and accounting data for a broad sample of firms over the period June 1984 through December 2008, they find that: Keep Reading

A Few Notes on The Dark Side of Valuation

In the 2009 second edition of his book, The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Professor of Finance Aswath Damodaran, investigates and offers remedies for “dark practices and flawed methods in valuation.” He emphasizes “the importance of first principles in valuation and how they should guide us when we’re faced with estimation questions and issues.” As summarized in the closing chapter, the key enlightening propositions of the book are: Keep Reading

Have You Ever Investigated Accruals and valuedog.com?

A reader asked: “Have you ever investigated: (1) the work of R. G. Sloan on the predictive power of accruals (both negative and positive); and, (2) the web site www.valuedog.com? It’s not kept up-to-date anymore, but the ‘earnings torpedo’ and ‘value screen’ parts of the web site are still maintained on a monthly basis, complete with charts. It claims to be ‘based on work at the University of Michigan Business School.’ They used to publish a monthly list of companies with positive or negative accrual attributes, but don’t anymore. I can’t find anyone else that does.” Keep Reading

Performance of the Value Line Select ETF Index

The Value Line Select ETF (VLSE) Index “is an equal-dollar weighted index comprised of between 30 and 100 U.S. traded ETFs ranked #1 by Value Line Publishing, Inc… The Value Line ETF Ranking System seeks to select the ‘best-for-investment’ ETFs among all U.S. traded ETFs…approximately 10% of all traded ETFs but no more than 100 ETFs. The Value Line Select ETF Index is rebalanced and reconstituted once per quarter… Upon Value Line Select ETF Index’s introduction in 2008, the index values were computed on a daily basis dating back to 2003 to provide a historical frame of reference.” Does this approach to ETF investing beat the market? Using self-reported daily performance data for the VLSE Index over the period 10/21/02 through 8/14/09 (almost seven years), and contemporaneous daily returns for S&P Depository Receipts (SPY) for benchmarking , we find that: Keep Reading

Predictive Power of Aggregate Versus Firm-specific Earnings

Do aggregate earnings (for example, for the S&P 500) predict stock market behavior? In their 2008 paper entitled “Aggregate Earnings, Firm-Level Earnings and Expected Stock Returns”, Turan Bali, Ozgur Demirtas and Hassan Tehranian analyze the predictability of stock returns using market, industry and firm-level earnings. Using monthly stock return data and quarterly fundamentals data for a broad range of U.S. stocks focused mostly on the period from mid-1972 through 2002, they conclude that: Keep Reading

A Few Notes on Full of Bull

In the 2009 edition of his book, Full of Bull, author Stephen McClellan seeks to “expose the puzzling and deceptive behavior of Wall Street that so disadvantages individual investors, tripping them up in their attempts to invest properly and rationally. It unscrambles the confounding practices of the Street in terms a layperson can comprehend. …Once armed with an insider’s understanding of all the Street’s subtleties, you can be your own investment analyst.” Stephen McClellan was a securities analyst for 32 years. The principal messages of the book are: Keep Reading

A Few Notes on Quantitative Strategies for Achieving Alpha

In his 2009 book, Quantitative Strategies for Achieving Alpha, flagged by Jeff Partlow, author Richard Tortoriello “seeks to determine empirically the major fundamental and market-based drivers of future stock market returns” by testing over 1,200 alternative investment strategies. He believes “that the quantitative approaches outlined in this book can provide a proven way to generate investment ideas for the qualitative investor as well as a discipline that can help improve investment results.” Richard Tortoriello is an equity research analyst with Standard & Poor’s. The principal elements of the book are: Keep Reading

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