A two-step method for assessing enhanced value in turnaround, spin-off, and value stocks

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To assess outright and relative value opportunities in stocks and benchmark their performance against an index with global relevance, it is important to achieve and measure risk-adjusted excess returns. Academic and corporate research has focused quite extensively on analyzing stock returns and comparing the outperformance of specific investment strategies, with value investing being one of the most prominent and longest-known factor strategies. In this event study, to test for the existence of risk-adjusted excess returns, or alpha, a novel two-step approach is proposed to assess Enhanced Value in single stocks for three different investment approaches: plain value investing, investing in spin-offs, and investing in turnaround companies. While the first step of the two-step approach screens companies for a combination of financial company characteristics, the second step ranks and sorts them by either their price-earnings ratio or by their price-book ratio, thus “enhancing” the value assessment. Their short- and mid-term stock performance is investigated for an investment horizon of one year, three years, and five years. Stocks of value companies, spin-offs, and turnaround companies outperform the S&P 500 benchmark on average and on a risk-adjusted basis for all three investment horizons when tested for Enhanced Value with the novel two-step approach. The analysis results provide deeper insights into how the value factor in its different characteristics needs to be understood in the context of investment strategies and how it potentially can be applied to stock selection and portfolio construction, resulting in investment strategies showing a risk-adjusted outperformance.

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    • Figure 1. Average one-year returns over time
    • Table 1. Average short-term 1-year excess return of value stocks
    • Table 2. Average short-term 1-year excess return of spin-off subsidiary stocks
    • Table 3. Average short-term 1-year excess return of turnaround stocks
    • Table 4. Description of screening criteria for value stocks
    • Table 5. Z-score: definition of successful turnaround companies
    • Table 6. Country breakdown of portfolio constituents for each investment approach
    • Table 7. Categorization of portfolios according to their P/E ratio
    • Table 8. Categorization of portfolios according to their P/B ratio
    • Table 9. Market return of the S&P 500 index over the three analyzed investment horizons between 2000 and 2019
    • Table 10. Return statistics for the stocks of the three different investment approaches of Step One
    • Table 11. Risk-adjusted return statistics of the three different investment approaches of Step One
    • Table 12. Risk-adjusted return statistics of the three different investment approaches of Step Two (P/E ratio criteria)
    • Table 13. Risk-adjusted return statistics of the three different investment approaches of Step Two (P/B ratio criteria)
    • Data curation
      Nicolas Pfister
    • Formal Analysis
      Nicolas Pfister
    • Investigation
      Nicolas Pfister
    • Methodology
      Nicolas Pfister, Michael J. Kendzia, Jan-Alexander Posth
    • Validation
      Nicolas Pfister, Jan-Alexander Posth
    • Visualization
      Nicolas Pfister
    • Writing – original draft
      Nicolas Pfister
    • Conceptualization
      Michael J. Kendzia, Jan-Alexander Posth
    • Funding acquisition
      Michael J. Kendzia, Jan-Alexander Posth
    • Supervision
      Michael J. Kendzia
    • Writing – review & editing
      Michael J. Kendzia, Jan-Alexander Posth