As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
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Fundamental Analysis and Position Trading
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This page reviews the result from a study of return on shareholders' equity.
Value Line defines the return on shareholders' equity as "annual net profit divided by year-end shareholders' equity," where shareholders' equity is "a balance sheet item showing a company's net worth. Represents the sum of common and preferred equity including redeemable preferred. Also includes intangibles." What are intangibles? "Assets such as goodwill (the excess of cost over net assets of companies acquired by purchase), patents, trademarks, unamortized debt discounts, and deferred charges." Clear as mud. I think of shareholders' equity as the net worth of the company and leave it at that.
A study of the return on shareholders' equity shows the measure has little benefit to picking stocks that outperform. A low return on shareholders' equity works better than a high return 49% of the time. That is random. However, the measure seems to add benefit during and after a bear market, but additional samples may change that assessment.
Other fundamental analysis ratios predict better performance.
I used the Value Line investment survey and typed in their return on shareholders' equity percentages to build a database of 178 stocks with data ranging from 12/30/1991 to 7/11/2008.
After completing the database, I logged the close-to-close price change from 1 to 5 years out, looking forward from the base year. The base year ranged from 1992 to 2006. Not all stocks covered the entire range. Years with no numbers were excluded. The price change measured from the close on the last trading day of each year. Years 2008 and later are not included since the year had not completed as of the time of this study.
The following table shows the results of return on shareholders' equity (ROSE) versus performance over time.
| Base Year | ROSE | Median ROSE | 1 year | 2 years | 3 years | 4 years | 5 years | Samples |
| 1998 | High | 15.95% | 23.0% | 18.6% | 13.8% | 6.5% | 11.7% | 61 |
| Low | 18.7% | 7.0% | 5.9% | 2.0% | 11.0% | 61 | ||
| 1999 | High | 15.25% | 1.9% | 8.1% | 0.2% | 8.3% | 11.4% | 64 |
| Low | -9.9% | -8.4% | -9.0% | 0.0% | 5.7% | 64 | ||
| 2000 | High | 15.45% | 7.6% | -2.5% | 8.1% | 11.6% | 11.1% | 66 |
| Low | -3.2% | -6.7% | 6.7% | 13.4% | 18.3% | 66 | ||
| 2001 | High | 13.2% | -13.2% | 6.1% | 10.5% | 11.8% | 12.8% | 65 |
| Low | -8.6% | 13.5% | 22.2% | 22.9% | 24.5% | 67 | ||
| 2002 | High | 12.2% | 28.5% | 24.2% | 19.7% | 20.9% | 13.5% | 66 |
| Low | 40.3% | 43.1% | 41.7% | 38.4% | 37.5% | 68 | ||
| 2003 | High | 12.45% | 17.6% | 14.3% | 14.3% | 11.2% | 70 | |
| Low | 28.3% | 25.0% | 25.3% | 21.7% | 70 | |||
| 2004 | High | 13.8% | 19.9% | 17.7% | 15.6% | 77 | ||
| Low | 16.8% | 16.9% | 14.6% | 78 | ||||
| 2005 | High | 15.5% | 10.6% | 12.8% | 81 | |||
| Low | 19.8% | 10.2% | 82 | |||||
| 2006 | High | 16.45% | 12.6% | 82 | ||||
| Low | 2.0% | 82 | ||||||
| Base Year | ROSE | Median ROSE | 1 year | 2 years | 3 years | 4 years | 5 years | Samples |
Let's take an example using 2006. Stocks with a return on shareholders' equity above the median 16.45% had gains averaging 12.6% in 2007 compared to gains of 2.0% for stocks with return on shareholders' equity at or below the median. No more results appear for that row because the years had not ended when the study was done. There were 82 samples that qualified for the study.
Notice that the bear market years of 2001 to 2003 have the low return on shareholders' equity showing future outperformance when compared to the high return measure. If you add up the winners and losers of the 35 test periods, you will find that the low return on shareholders' equity beats the high return category 49% of the time. I consider that random, although the bear market years tend to show above average results, perhaps due to low sample counts.
I consider these results preliminary since I intend to expand the database and then publish my findings.
-- Thomas Bulkowski
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