Stock-Picking¶

Value¶

In short, cheap stocks outperform expensive stocks.

Value investing was established by Benjamin Graham in his book Security Analysis from 1934.

Value anomally is one of the best known and has been popularized by Warren Buffett (arguably one of the best active investors).

Our algorithm ranks all stocks based on Enterprise Value/EBIT from the smallest (cheapest) to the highest (most expensive).

There are various measures of cheapness (mentioned EV/EBIT, Price/Earnings, Price/Book Value, ...). However, all of them provide similar results.

Quality¶

In short, high quality companies outperform low quality companies.

Quality can be expressed using different measures, however we use the simplest one: Return on Assets.

Various studies confirm, that quality is an important factor in determining whether the stock will perform well in the future.

Stocks are sorted on their ROA, and the ones with the highest ROA are selected.

Low Volatility¶

In short, low-volatility stocks outperform high-volatility stocks.

Volatility (stock price fluctuations) is a way to define risk. In finance it is generally accepted that risk is positively related to return.

However results of empirical studies on low-volatility effect show the opposite. The investors who hold high-volatility stocks are not compensated enough.

The pioneer of low-volatility investing - Robert Haugen - published the first empirical study in 1972. The studies covering low-volatility anomally document its existence since 1926. Quite a few ETFs have been created recently based on low-volatility anomally: * PowerShares S&P 500 Low Volatility Portfolio * iShares MSCI USA Minimum Volatility Index * iShares MSCI Emerging Markets Minimum Volatility Index * SPDR Russell 2000 Low Volatility ETF

Asset Growth¶

In short, companies with low asset growth outperform companies with high asset growth.

Firms with rapidly growing balance sheets via equity offering or debt perform worse than companies with decreasing balance sheet due to spinoffs, share repurchases or debt repayments.

Higher asset growth usually creates hopes too high for investors. Analyst forecasts are then often revised downward and earnings dissapoint.

Accruals¶

In short, companies with big accrual component of earnings perform worse than companies with small accrual component.

Earnings consist of cash flow and accruals.

Accruals involve higher degree of uncertainty than cash flow.

Academic research defines accruals as the change in non-cash working capital less depreciation expense.

Accruals incorporate estimates of future cash flows, deferrals of past cash flows, allocations and valuations, all of which involve higher subjectivity than simply measuring periodic cash flow.

Accruals lead to lower earnings persistence and investors do not fully anticipate this lower persistence, leading to significant security mispricing.

Shareholder yield¶

In short, high shareholder yield stocks outperform low shareholder yield stocks.

Shareholder yield is a more comprehensive measure than a dividend yield. It includes dividend yield and share repurchases.

The anomaly shows that companies that return excess cash to shareholders perform better in the future.

This might be related to the sense of responsibility of managers that prefer to return the cash to shareholders if they do not need it.

Thus, managers are more likely to engage in reponsible governance overall.

Momentum¶

In short, stocks with high momentum outperform stocks with low momentum.

Momentum has first been mentioned in Jegadeesh study in 1993.

Various studies document existence of momentum in equity markets since 1801, thus in over 200-year history.

Studies find that stocks that have performed well in the past 3 to 12 months tend to continue performing well up to 12 months in the future.