Mohanram (2003)

Reference

Is Fundamental Analysis Effective for Growth Stocks?^aaa

Partha S. Mohanram

Working Paper, Columbia University.

[Click Here to Download as PDF]

Synopsis

This paper shows that we can dramatically improve the returns to a low book-to-market strategy by screening firms on measures of financial health, stability and conservatism. The paper focuses on 'growth stocks' in the lowest quintile of book-to-market. It then allocates these stocks to deciles based on a composite measure of the financial health and performance. This composite consists of 9 signals that measure profitability, cash flow, growth stability and investments in intangibles such as R&D and advertising. The annual hedge portfolio return to longing the high score firms and shorting the low score firms is 20% (see table 6). A notable feature of the results is that the hedge portfolio returns are driven by the short positions, which have an abnormal return of -18%. The bottom line from the paper is that fundamental analysis is helpful in identifying "torpedo" stocks.