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Ebook What works on Wall street: Part 2

(BQ) Part 2 book "What works on wall street" has contents: Retura on equity; five year earniags per share percentage changes; two multifactor value liodels for ad stocks; relative price strength - widders codtinue to wid; searchidg for a cornerstode growth strategy; rankiog the strategies,.and other contents. | 12 Five-Year Eamings-Per-Share Percentage Changes The same thing happened today that happened yesterday, only to different people. -WALTER WINCHELL Some analysts believe that a 1-year change in earnings is meaningless and that we should focus on 5-year growth rates. This, they argue, is enough time to separate the one-trick pony from the true thoroughbred. The Results Unfortunately,S years of big earnings gains doesn't help us pick thoroughbreds. Starting on December 31, 1954 (we need 5 years of data to compute the compound 5-year earnings growth rate), $10,000 invested in the 50 stocks from All Stocks with the highest 5-year compound earnings-per-share growth rates grew to just $353,446 by the end of 1994, a compound return of 9.32 percent. An investment of $10,000 in the All Stocks universe on December 31, 1954, was worth $1,091,933 by December 31, 1994, a return of 12.45 percent a year As with the 50 stocks with the highest 1-year earnings gains, investors get dazzled by high 5-year earnings growth rates and bid 181 162 Chapter Twelve prices to unsustainable levels. When the future earnings are lower than expected, investors punish their former darlings and prices swoon. The 50 stocks from All Stocks with the highest compound 5-year earnings growth rates were also risky-their standard deviation of return was 27.07 percent, well ahead of All Stocks' 19.83 percent. High risk coupled with poor return accounts for the Sharpe ratio of 26. Over the same period, the Sharpe ratio for All Stocks was 43. All the base rates for the strategy are horrible, with the 50 stocks with the highest 5-year compound earnings growth rates beating All Stocks just 3 percent of the time over all rolling 10-year periods. Tables 12-1, 12-2, and 12-3 summarize the results. Large Stocks Are Similar The news is just as bad for large stocks with outstanding 5-year earnings gains-they perform about half as well as an investment in the Large Stocks universe. Starting on December 31, .