Professional Documents
Culture Documents
Partha Mohanram
Phillip H. Geier Jr. Associate Professor of Business Columbia Business School
Topics
How fundamental analysis applies to growth stocks Applying the GSCORE to growth stock portfolios Historical portfolio results of the growth stock model Unsuccessful approaches of fundamental analysis to growth stock portfolios
IMPORTANT GLG INSTITUTE DISCLAIMER By making contact with this/these Council Members and participating in this event, you specifically acknowledge, understand and agree that you must not seek out material non-public or confidential information from Council Members. You understand and agree that the information and material provided by Council Members is provided for your own insight and educational purposes and may not be redistributed or displayed in any form without the prior written consent of Gerson Lehrman Group. You agree to keep the material provided by Council Members for this event and the business information of Gerson Lehrman Group, including information about Council Members, confidential until such information becomes known to the public generally and except to the extent that disclosure may be required by law, regulation or legal process. You must respect any agreements they may have and understand the Council Members may be constrained by obligations or agreements in their ability to consult on certain topics and answer certain questions. Please note that Council Members do not provide investment advice, nor do they provide professional opinions. Council Members who are lawyers do not provide legal advice and no attorney-client relationship is established from their participation in this project. You acknowledge and agree that Gerson Lehrman Group does not screen and is not responsible for the content of materials produced by Council Members. You understand and agree that you will not hold Council Members or Gerson Lehrman Group liable for the accuracy or completeness of the information provided to you by the Council Members. You acknowledge and agree that Gerson Lehrman Group shall have no liability whatsoever arising from your attendance at the event or the actions or omissions of Council Members including, but not limited to claims by third parties relating to the actions or omissions of Council Members, and you agree to release Gerson Lehrman Group from any and all claims for lost profits and liabilities that result from your participation in this event or the information provided by Council Members, regardless of whether or not such liability arises is based in tort, contract, strict liability or otherwise. You acknowledge and agree that Gerson Lehrman Group shall not be liable for any incidental, consequential, punitive or special damages, or any other indirect damages, even if advised of the possibility of such damages arising from your attendance at the event or use of the information provided at this event.
About Me
Professor at Columbia since 2003
On NYU Stern Faculty since 1998
GSCORE Paper
Todays presentation based on the paper
Separating Winners from Losers Among Low Book-toMarket Stocks using Financial Statement Analysis Presented at NYU, Harvard, Berkeley and the Review of Accounting Studies Conference Published in the Review of Accounting Studies (2005)
Growth Stocks
Growth Firms identified by their Market-to-Book (or Book-toMarket) ratio is.
Firms in the top 20% of MB, or equivalently bottom 20% of BM considered growth stock.
Empirical Fact
Growth Stocks perform poorly, underperforming by almost 10% historically Unclear if this is because of risk or mispricing However, we do know that some growth stocks end up as the Googles and Microsofts of the world and others as the Dr. Koops.
Eight Yes/No Questions in three categories. Can be viewed as a serial stock screening method Three kinds of signals
Traditional profitability signals (ROA, CF ROA)
No breakdowns into margins, turnovers etc
Investors naively extrapolate current earnings and growth performance into stock price
Some firms may have lucky current realizations, not likely to persist Focus on firms with track record of stable earnings and growth Measure earnings and growth variability as variance of past earnings (NI/Assets) and sales growth respectively
1.
2.
Accounting treatment for these also depress current earnings and book values
Low B vs. High M Stocks
1. 2. 3.
Is firms R&D/Assets greater than peers? Is firms Advertising/Assets greater than peers? Is firms Capex/Assets greater than peers?
Individual Examples
High GSCORE SAMPLE TICKER CSCO ACN MSFT LLTC NAME CISCO SYSTEMS INC ACCENTURE LTD MICROSOFT LINEAR TECHNOLOGY CORP GSCORE (end of 2005) 8 8 7 7 Return (in 2006) 30.5% 28.4% 24.9% -13.8% Works YES YES YES NO
Low GSCORE SAMPLE TICKER OPWV SIRI AMTD MICC NAME OPENWAVE SYSTEMS INC SIRIUS SATELLITE RADIO INC TD AMERITRADE HOLDING CORP MILLICOM INTL CELLULAR SA GSCORE (end of 2005) 2 2 2 2 Return (in 2006) -50.4% -24.4% -12.8% 25.3% Works YES YES YES NO
40.0%
30.0%
20.0%
10.0%
0.0% 1979 -10.0% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
-20.0%
Analysis of Results
Robust Across Time
Unlikely to be driven by risk based explanations
Implications
This approach helps identify which stocks to avoid.
Important for investors who can use this approach to separate the wheat from the chaff.
This strategy can be profitable if one has the ability and willingness to short Basic Fundamental Analysis has a role to play in the growth stock space as well.
Dont waste your time looking for the next new paradigm. One has to tailor fundamental analysis to suit growth stocks where it is all about expectations and long term performance.
Strategy works well in portfolios with at least 50 stocks in both groups (high GSCORE and low GSCORE stocks).
It may not work well with individual picks.