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Allocations for September 2023 (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.

De-Snooping Market Timing Rules Based on Fundamental and Sentiment Indicators

Some analysts fail to account for data snooping bias in their analyses of market timing indicators. This bias amounts to incorporating pure luck into results by testing many different rule variations or parameter settings within rules (or inhaling the “secondary smoke” of other analysts who have already screened a set of rules/parameters). This luck does not persist out-of-sample. Do any market timing rules generate outperformance after correcting for this bias? In their February 2009 paper entitled “Data Snooping and Market-Timing Rule Performance”, Andreas Neuhierl and Bernd Schlusche assess the profitability of a comprehensive set of simple and complex market timing rules based on fundamental indicators and investor sentiment indicators after correcting for data snooping bias. Simple rules derive from a single indicator, and complex rules derive from multiple indicators. Using thousands of simple and complex rules based on data for the S&P 500 to time the daily close of the S&P 500 index over the period 1980-2007, they conclude that: Keep Reading

Asset Growth Rate as a Return Indicator

Is firm total asset growth rate an independently valuable indicator of future stock returns? In their January 2009 paper entitled “The Asset Growth Effect in Stock Returns”, Michael Cooper, Huseyin Gulen and Michael Schill review the evidence for a strong asset growth effect in U.S. stock returns unexplained by other widely cited effects. Using firm fundamentals and stock return data for all non-financial U.S. public companies over the period 1968-2007, they conclude that: Keep Reading

Relative Cash Holdings Premium

Does the percentage of assets held in cash by a company, as an indicator of operating and investment flexibility, predict stock returns? In his January 2009 paper entitled “Firm’s Cash Holdings and the Cross-Section of Equity Returns”, Dino Palazzo measures and interprets the significance of relative cash holdings for future stock returns. Using stock return and firm fundamentals data spanning July 1967 through June 2007, he concludes that: Keep Reading

The Profit from the Peak Portfolio

In their 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century, Brian Hicks and Chris Nelder examine the equity investment implications of a growing gap between a post-peak worldwide supply of energy from fossil fuels and a rising international demand for energy. They identify more than 70 companies that, in their judgment, are best positioned to exploit declining oil and gas supplies or “energy alternatives poised to power the years ahead.” How have the stocks of these companies performed over the past few years and in the very recent past? Using monthly dividend-adjusted return data for the recommended stocks as available from Yahoo!Finance for the period December 2000 through December 2008, we find that: Keep Reading

Cash as a Valuation Indicator

Does the level of cash held by a company, appropriately normalized for its business characteristics, reliably indicate the prospects for its stock? If so, is a high or low level of cash better for the stock? In his January 2009 paper entitled “Excess Cash Holdings, Risk, and Stock Returns”, Mikhail Simutin investigates the relationship between excess corporate cash holdings and future stock returns. He defines “excess” via multi-factor regression to normalize for key firm characteristics. Using characteristics, fundamentals and stock return data for non-financial U.S. companies over the period 1960-2006, he concludes that: Keep Reading

Methods and Results for ValueInvestorsClub.com Members

How do professional value investors make investment decisions? Do they beat the market? In their January 2009 preliminary paper entitled “Fundamental Value Investors: Characteristics and Performance”, Wesley Gray and Andrew Kern examine the detailed investment decision process and aggregate performance of professional value investors who participate in ValueInvestorsClub.com, an “exclusive [and confidential] online investment club where top investors share their best ideas.” The founders of ValueInvestorsClub.com are Joel Greenblatt and John Petry of Gotham Capital. Using a sample of 2,912 investment recommendations by ValueInvestorsClub.com members during January 2000 through June 2008, along with associated firm fundamentals and stock return data, they conclude that: Keep Reading

S&P 500 Quarterly Aggregate Earnings Estimate Evolutions

Several readers have inquired or commented about the accuracy of  Standard and Poor’s quarterly S&P 500 earnings estimates. How accurate have they been? Since late 2005, we have tracked the evolving bottoms-up S&P 500 year-over-year quarterly operating earnings growth estimates for 2006-2009 at roughly biweekly intervals. During the early part of this period, we recorded the average of the publicly available Standard and Poor’s and Reuters earnings estimates (generally similar). During the latter part, we recorded only the Standard and Poor’s estimates. Using evolving earnings forecasts for 2006-2009, we find that: Keep Reading

“It’s the P/E, Stupid!”

Is there a relationship between investor risk-aversion, as indicated by the aggregate U.S. stock market price-earnings ratio (P/E), and level of public satisfaction with the performance of the President? In their December 2008 paper entitled “Speculating on Presidential Success: Exploring the Link between the Price-Earnings Ratio and Approval Ratings”, Tomasz Wisniewski, Geoffrey Lightfoot and Simon Lilley examine the relationship between aggregate stock market P/E and the surveyed level of public approval of the current President. Using quarterly P/E for the S&P Composite Stock Price Index derived from Robert Shiller’s long-run dataset and Gallup presidential approval survey data from the beginning of 1950 through the third quarter of 2007 (231 observations), they conclude that: Keep Reading

Kicking the Body of the Fed Model

As with many indicators, the Fed Model is presently so far out of multi-generational bounds that reversion seems hopeless. Is the body still warm, or ready for burial? Using the daily S&P 500 earnings yield (E/P) during 1/2/90-12/4/08, as calculated from the historical S&P 500 index and 12-month trailing Standard & Poor’s earnings data, and contemporaneous daily 10-year Treasury note (T-note) yields, we find that… Keep Reading

Long-term Market Timing Model Flyoff

Do long-term stock market timing models work? If so, which type works best? In their October 2005 paper entitled Timing is Everything: A Comparison and Evaluation of Market Timing Strategies, Chris Brooks, Apostolos Katsaris and Gita Persand investigate the profitability of several timing models over a very long sample of S&P 500 index returns. Specifically, they test the timing power of: (1) the ratio of the long-term Treasury bond yield to the stock dividend yield; (2) the spreads between the stock earnings yield and the yields on either the three-month Treasury bills (T-bills) or the 10-year Treasury notes (T-notes); (3) a model for predicting when bear markets will occur based on the spread between T-note and T-bill yields; and, (4) an approach for predicting market turning points based on speculative bubbles. Timing signals trigger binary switching between stocks and T-bills. Using monthly stock return and model parameter data from January 1871-December 1926 for initial model calibration and January 1927-August 2003 for model testing and recalibration (a total of 1,592 months), they find that: Keep Reading

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