Fundamental Valuation

Do the Best Brands, as published annually by Interbrand based on net present value of predicted incremental earnings due to brand, offer superior investment performance due to pricing power and superior operating practices? In their June 2022 paper entitled “Is Buffett Right? Brand Values and Long-run Stock Returns”, Hamid Boustanifar and Young Dae Kang examine the investment performance of Best Brands. Best Brands companies must be global, have publicly available financial data, be visible and have the expectation of positive long-term profitability above the cost of capital). Up to 2007 (subsequently), Interbrand published Best Brand lists in July or August (late September or October). The authors each year reform a Best Brands portfolio limited to U.S. firms the first day of the month after publication, thereby excluding immediate announcement effects on stock prices. For stocks encompassing multiple brands (e.g., Google and YouTube for Alphabet), they map brands to stocks by summing brand values. Using firm characteristics, accounting data and stock prices for a broad sample of U.S. stocks during 2000 (the first Best Brands list) through 2020, they find that:

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A subscriber suggested looking at the S&P 500 price-to-sales ratio (P/S) as an indicator for timing the U.S. stock market. To investigate, we relate P/S and change in P/S to S&P 500 Index (SP500) returns, as follows:

1. Conduct lead-lag analyses for quarterly P/S versus quarterly SP500 returns, and for quarterly change in P/S versus SP500 returns.
2. Calculate average next-quarter SP500 returns by range of quarterly values of P/S and quarterly changes in P/S.

Using quarterly S&P 500 P/S data since the end of December 2000 and quarterly closing SP500 levels since December 1999, both through June 2022, we find that: Keep Reading

“SACEMS with Margin” investigates the use of target 2X leverage via margin to boost the performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS). “SACEVS with Margin” investigates the use of target 2X leverage via margin to boost the performance of the “Simple Asset Class ETF Value Strategy” (SACEVS). In response, a subscriber requested a sensitivity test of 1.25X, 1.50X and 1.75X leverage targets. To investigate effects of these leverage targets, we separately augment SACEVS Best Value, SACEMS EW Top 2 and the equally weighted combination of these two strategies by: (1) initially applying target leverage via margin; (2) for each month with a positive portfolio return, adding margin at the end of the month to restore target leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore target leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratio, compound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate. Using monthly total (dividend-adjusted) returns for the specified assets since July 2002 for SACEVS and since July 2006 for SACEMS, both through May 2022, we find that:

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Is leveraging with margin a good way to boost the performance of the “Simple Asset Class ETF Value Strategy” (SACEVS)? To investigate effects of margin, we augment SACEVS by: (1) initially applying 2X leverage via margin (limited by Federal Reserve Regulation T); (2) for each month with a positive portfolio return, adding margin at the end of the month to restore 2X leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore 2X leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratio, compound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics for Best Value (which picks the most undervalued premium) and Weighted (which weights all undervalued premiums according to degree of undervaluation) variations of SACEVS. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate and consider a range of margin interest rates as increments to this yield. Using monthly total returns for SACEVS and monthly T-bill yields during July 2002 through May 2022, we find that:

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Is the Buffett Indicator, the ratio of total stock market capitalization to Gross Domestic Product (GDP), a useful indicator of future stock market performance internationally? In their March 2022 paper entitled “The Buffett Indicator: International Evidence”, Laurens Swinkels and Thomas Umlauft extend Buffett Indicator research from the U.S. to 14 international equity markets. Because the value of the indicator varies so much across countries at a given time (for example, 1.48 for the U.S. and 0.55 for Germany at the end of 2019), they first look at time-series predictability of returns by the Buffett Indicator within each country. They then compare predictive power of the Buffett Indicator to those of Shiller’s cyclically-adjusted price-to-earnings ratio (CAPE or P/E10) and mean-reversion in stock returns. Finally, they test a trading strategy that invests in the stock markets of those countries having low values of the Buffett Indicator relative to their respective (expanding window) histories. Using stock market valuation and earnings data and GDP series for 14 countries as available during 1973 through 2019, they find that:

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Can investors improve the performance of stock momentum portfolios by isolating stocks that “hold” their momentum? In their April 2022 paper entitled “Enduring Momentum”, Hui Zeng, Ben Marshall, Nhut Nguyen and Nuttawat Visaltanachoti exploit firm characteristics to identify stocks that continue to be winners or losers after selection as momentum stocks (stocks with enduring momentum). They measure momentum by each month ranking stocks into equal-weighted tenths, or deciles, based on past 6-month returns, with the top (bottom) decile designated winners (losers). They then develop a model that uses information from 37 firm characteristics to estimate each month the probability that each winner or loser stock will continue as a winner or loser during each of the next six months. They verify that the model reasonably predicts momentum persistence and proceed to test the economic value of the predictions by each month reforming an enduring momentum hedge portfolio that is long (short) the 10 equal-weighted winner (loser) stocks with the highest probabilities of remaining winners (losers) and holding the portfolio for six months. They compare the performance of this portfolio to that of a conventional momentum portfolio that is each month long the entire winner decile and short the entire loser decile, also held for six months. Using returns for a broad sample of U.S. common stocks priced over $1.00 and 37 associated firm characteristics during January 1980 through December 2018, they find that: Keep Reading

The “Simple Asset Class ETF Value Strategy” (SACEVS) allocates across 3-month Treasury bills (Cash, or T-bill), iShares 20+ Year Treasury Bond (TLT), iShares iBoxx $ Investment Grade Corporate Bond (LQD) and SPDR S&P 500 (SPY) according to the relative valuations of term, credit and equity risk premiums. Does applying a simple moving average (SMA) filter to SACEVS allocations improve its performance? Since many technical traders use a 10-month SMA (SMA10), we apply SMA10 filters to dividend-adjusted prices of TLT, LQD and SPY allocations. If an allocated asset is above (below) its SMA10, we allocate as specified (to Cash). This rule does not apply to any Cash allocation. We focus on gross compound annual growth rates (CAGR), maximum drawdowns (MaxDD) and annual Sharpe ratios (using average monthly T-bill yield during a year as the risk-free rate for that year) of SACEVS Best Value and SACEVS Weighted portfolios. We compare to baseline SACEVS as currently tracked and to the SMA rule applied to a 60%-40% monthly rebalanced SPY-TLT benchmark portfolio (60-40). Finally, we test sensitivity of main findings to varying the SMA lookback interval. Using SACEVS historical data, monthly dividend-adjusted closing prices for the asset class proxies and yield for Cash during July 2002 (the earliest all funds are available) through March 2022, we find that:

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How does the U.S. stock market earnings yield (inverse of price-to-earnings ratio, or E/P) interact with the U.S. inflation rate over the long run? Is any such interaction exploitable? To investigate, we employ the long run dataset of Robert Shiller. Using monthly data for the S&P Composite Stock Index, estimated aggregate trailing 12-month earnings and dividends for the stocks in this index, and estimated U.S. Consumer Price Index (CPI) during January 1871 through February 2022 (over 151 years), and estimated monthly yield on 1-year U.S. Treasury bills (T-bills) since January 1951, we find that:

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Are firms offering products and services purported to mitigate climate change compelling investments? In the February 2022 revision of their paper entitled “Climate Solutions Investments”, Alexander Cheema-Fox, George Serafeim and Hui Wang analyze international reports, regional net zero frameworks, research papers and news to develop a list of 164 key words/phrases associated with climate change solution business areas. They apply these key words/phrases to firm descriptions to identify 632 actively traded pure plays in climate solutions. They then characterize geographies, accounting fundamentals and valuation ratios for this sample and construct monthly rebalanced value-weighted and equal-weighted climate solutions portfolios (CSP). Using monthly firm fundamentals and stock trading data for these 632 firms from the end of 2010 through October 2021, they find that: Keep Reading

“Consumer Credit and Stock Returns” finds that expansion (contraction) of consumer credit, available monthly from the Federal reserve with a delay of about five weeks, has little or no power to predict overall stock market returns. Might consumer credit be useful in predicting returns for just the consumer discretionary sector, as proxied by Consumer Discretionary Select Sector SPDR Fund (XLY)? Using monthly seasonally adjusted total U.S. consumer credit and monthly dividend-adjusted prices for XLY as available during December 1998 (inception of XLY) through January 2022, we find that: Keep Reading