By employing financial data screening we show that profitable value investment strategy can be built within the S&P 500 stock universe. We use simple ranking of stocks based on four screens that we identify as good joint candidates to influence stock returns – book-to-market ratio, return on equity, market capitalization and risk of bankruptcy. As expected, our four-variable portfolio consistently beats the market, which points to the fact that investors inefficiently price stocks in the world's most developed capital market. We compare performance of our investment strategy with market performance, and also adjust for risk used in both current conventional asset pricing models – CAPM and Fama & French three-factor model. When comparing performance of our four-variables portfolio strategy to separate single-variable strategies, we find that other strategies record even higher returns. However, returns of such strategies exhibit lower significance levels, and are more volatile than the four-variable investment strategy.
Smolič, G., & Berk, A. (2017). Value Investing within the Universe of S&P500 Equities. Economic and Business Review, 19(3). https://doi.org/10.15458/85451.41