The Analysts Come Up Short

What factors work best when looking at stocks? Three academics (Kateryna Shapovalova, Alexander Subbotin and Thierry Chauveau) took a look. Here’s an excerpt from their paper, “Returns Premia on Company Fundamentals.”

Several accounting fundamentals do generate significant return premia, regardless of whether the sensitivities to the conventional systematic risk factors and price momentum are controlled for or not. Testing a large set of accounting fundamentals, we find that the book-to-price ratio, company size, past year sales growth and the amount of reinvested return on equity (“internal growth”) have the most pronounced impact on returns. Surprisingly, indicators related to earnings and their growth and analysts’ forecasts have relatively small impact. Besides, indicators computed over the past year contain more information than the long-term averages.

This isn’t very surprising. It really doesn’t matter which value factor you look at; they all basically measure the distress factor — how much the market is discounting the stock. Much of what the analysts have to say is already factored in.

With a study like this, I think the key is to see when a “price to something” variable is down but some other factor (like ROE) is still healthy.

I should add that I really wish they’d ditch all that three-factor model stuff.

Posted by on March 9th, 2011 at 9:42 am


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