Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for January 2022 (Final)
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Momentum Investing Strategy (Strategy Overview)

Allocations for January 2022 (Final)
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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.

Cash Flow Trumps Discount Rate in Stock Valuations?

Are expected cash flows (earnings) or expected discount rates (risk tolerance) more important in determining stock valuations? In the April 2008 version of their paper entitled “What Drives Stock Price Movement?”, Long Chen and Xinlei Zhao investigate the relative importance of cash flows and discount rates in equity valuation by studying the relationships among proportional stock price change, cash flow news and discount rate news at firm and aggregate levels. They make a critical assumption that analyst earnings forecasts are accurate and timely measures of investor beliefs regarding future cash flows. Using quarterly stock price data and contemporaneous prevailing earnings forecasts over the period 1985 through 2006, they conclude that: Keep Reading

Outperformance of High-Yield Stocks in the UK

Does a high dividend yield translate on average to high total return? In the February 2008 version of their paper entitled “Dividend Yield Strategy in the British Stock Market: 1994-2007”, Janusz Brzeszczynski, Kathryn Archibald, Jerzy Gajdka and Joanna Brzeszczynska examine the recent performance of an equally-weighted portfolio of UK stocks with the highest dividend yields. Using total dividend-reinvested return data for portfolios of the Top Ten highest dividend yield stocks in the FTSE 100, reformed annually on the first trading day in March, and for the index itself over the period 1994-2007 (13 years), they conclude that: Keep Reading

Still Irrationally Exuberant?

Are asset prices still in a behavioral bubble, sustained at least in part by wrongly using nominal rather than real interest rates in valuation calculations? In his October 2007 paper entitled “Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models”, Robert Shiller examines the Fed model-like belief that that long-term asset prices are generally high because monetary authorities are keeping long-term interest rates low. Using interest rate and inflation data for 1871-2007 and more recent behavioral evidence, he argues that: Keep Reading

Gaming the Earnings/Accruals Gamers?

Do companies systematically manage earnings in attempts to smooth out the bumps? If so, can investors detect and exploit such gaming? In their January 2008 paper entitled “Reconciling the Market’s Underreaction to Earnings Changes and Overreaction to (Abnormal) Accruals: An Earnings Management Explanation”, Henock Louis and Amy Sun investigate whether earnings management accounts for anomalous market reactions to earnings and accruals surprises. Specifically, they test whether firms with accelerating (deteriorating) earnings systematically manage earnings downward to create reserves (upward to avoid reporting losses). Using firm financial data and associated stock prices over the period 1988-2005, they conclude that: Keep Reading

A Tradable Accruals Anomaly

Do firms that manage accruals conservatively (liberally) tend to be good (bad) investments? In their June 2007 paper entitled “Repairing the Accruals Anomaly”, Nader Hafzalla, Russell Lundholm and Matt Van Winkle test adjustments to prior studies of the accrual anomaly to determine whether accruals can reliably predict future stock returns without look-ahead bias. One improvement is the use of Joseph Piotroski’s financial health score to refine accrual signals. The other improvement is to define accruals as a fraction of earnings rather than as a fraction of total assets. Using a sample of 72,668 firm-years spanning 1988-2004, they find that: Keep Reading

Asset Growth and the Cross-Section of Stock Returns

Does strong (weak) past growth in a company’s total assets predict high (low) future stock returns? Or, does investor overreaction to past data predict the opposite? In the July 2007 update of their paper entitled “Asset Growth and the Cross-Section of Stock Returns”, flagged by a reader, Michael Cooper, Huseyin Gulen and Michael Schill examine the relationship between firm asset growth (year-on-year percentage change in total assets) and subsequent stock returns. Using firm fundamentals and stock return data for all non-financial U.S. public companies over the period 1968-2003, they conclude that: Keep Reading

The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing (Chapter-by-Chapter Review)

In his 2007 book The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing, Louis Navellier, Chairman of the Board, Chief Executive Officer and Chief Investment Officer of Navellier & Associates, Inc., outlines his systematic approach to investing in timely growth stocks. This approach derives from his analysis-based belief that the market does not efficiently incorporate key indicators of growth into stock prices. Here is a chapter-by-chapter review of some of the key points in this book, along with some links to relevant research summaries: Keep Reading

Using Firm Productivity Measures to Enhance Stock Returns

Investors ought to reward a company that employs capital productively. One measure of firm productivity is return on invested capital (ROIC), the ratio of operating income to invested capital (debt plus equity minus cash from the balance sheet). Do stocks of high-ROIC firms outperform those of low-ROIC firms? In their June 2007 paper entitled “The Productivity Premium in Equity Returns”, David Brown and Bradford Rowe examine the relationship between ROIC and stock returns for both value stocks and growth stocks. They define value (growth) companies as those with high (low) CTEV, the ratio of invested capital (book value of equity plus debt minus cash) to enterprise value (market value of equity plus debt minus cash). Using monthly stock price data and contemporaneously available accounting fundamentals for the 1,000 largest U.S. companies during 1970-2005, they conclude that: Keep Reading

Does Customer Satisfaction Translate to Excess Stock Returns?

Do companies with high marks for customer satisfaction outperform as investments? Or, instead, does making customers happy crimp profit margins and stock returns? In their January 2006 Journal of Marketing article entitled “Customer Satisfaction and Stock Prices: High Returns, Low Risk”, Claes Fornell, Sunil Mithas, Forrest Morgeson III and M.S. Krishnan investigate the relationship between customer satisfaction as measured by the American Customer Satisfaction Index (ACSI) and stock returns. ACSI measurements are updated annually for each company rated. Using ACSI ratings for publicly traded companies during 1994-2004 and associated firm accounting and stock price data, they find that: Keep Reading

Do Good Employers Make Good Investments?

Do companies famously known as good places to work outperform as investments? Or, contrarily, do they waste resources keeping employees happy? In his May 2007 paper entitled “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices”, Alex Edmans analyzes the relationship between employee satisfaction and long-term stock performance. He identifies companies with exceptionally satisfied employees via Fortune magazine’s annual list of the “100 Best Companies to Work for in America.” Using these lists for 1998-2005 and monthly stock price data for the publicly traded companies in the lists (about 60 per year), he finds that: Keep Reading

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