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Fundamental Signals Strategy Daniel Cohn, Chase Navellier, Thomas Rogers

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Page 1: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Fundamental Signals Strategy Daniel Cohn, Chase Navellier, Thomas Rogers

Page 2: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Background

Page 3: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

The Fundamental Quality Anomaly

Quality Minus Junk Asness, Frazzini, Pedersen (2013)

Page 4: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

The Excess Returns of “Quality” Stocks: A Behavioral Anomaly Bouchaud, Cilberti, Landier, Simon, Thesmar (2016)

The Fundamental Quality Anomaly

Page 5: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

The Excess Returns of “Quality” Stocks: A Behavioral Anomaly Bouchaud, Cilberti, Landier, Simon, Thesmar (2016)

The Fundamental Quality Anomaly

Page 6: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Defining “Quality”

Profitability/Growth Safety Payout

GPOA BAB EISS

ROE IVOL

DISS

ROA LEV

NPOP

CFOA O-Score

GMAR Z-Score

ACC EVOL

Page 7: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Quantitative Warren Buffet: Quality at a Reasonable Price (QARP)

• Quality–Valuevs.Quality/Value•  Thereturnofqualitystocksvariesovertimewithveryhighcorrelationtothe“qualitypremium”paid

•  Sharperatiosof0.7and0.9fortheUSandGlobalstockuniverseswereachievedusingQARP

• Howtodefinevalue?

Page 8: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Our Project

Page 9: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Research Dataset

Page 10: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

The Quality Anomaly Illustrated

Page 11: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

End Goals

Page 12: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Finding the Best QARP Signal

•  Exploringspecificqualityandvaluefundamentalsthataremostpredictiveofhighreturns(highregressioncoefficientandhighR2)

• Combiningthemtocreatethemostpowerfuloverallsignal

Howtoimproveindividualandcategoryweighting?

Page 13: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Finding the Right Quality Metrics

Profitability/Growth Safety Payout

GPOA BAB EISS

ROE IVOL

DISS

ROA LEV

NPOP

CFOA O-Score

GMAR Z-Score

ACC EVOL

andmanymore…

Page 14: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Portfolio Construction

• Portfoliocanbemademarket-neutral,equalpartslongandshort,orlong-only

• Benchmarkofcomparisonwillvarydependingonthischoice

•  Sincequalitypredictsoutperformance,weplantocreateaweighted-averageportfoliobasedonourQARPsignal

Quantopianbacktestingpipeline

Page 15: Fundamental Signals Strategy - web.stanford.eduweb.stanford.edu/class/msande448/2018/Midterm/Gr4.pdfQuantitative Warren Buffet: Quality at a Reasonable Price (QARP) • Quality –

Separating Based on Industry

•  Fundamentalsalsopossesssignificantvariabilityamongindustries

•  Increasedgranularityshouldincreasethesignalpowersolongaswemaintainasignificantsamplesize

• Portfoliooptimizationamongstindustryweightingswouldthenyieldasuperiorresult


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