A New Value Investing Criterion: The Case of the S&P 500 Index

Abstract

This paper proposes a new fundamental analysis-based strategy to build a remunerative stock portfolio. The procedure works by selecting an equally weighted small subset of stocks from a broad reference population (for example the constituents of an index) and resetting the selection after some period (for example yearly). The selection is based on six filtering criteria, inspired to the value investing paradigm, aimed at evaluating profitability, financial condition and price convenience of each stock. This active approach is benchmarked against a passive strategy, represented by the Index. As case studies, we consider three separate portfolio selections from popular stock indices: the S&P 500 (from 2000 to 2017), the STOXX Europe 600 (from 2002 to 2017), the S&P 100 (from 2001 to 2018). Such sets of stocks are chosen because of the availability and reliability of financial statements of the companies included therein, a necessary condition to implement the selection methodology we propose. We find that the portfolios selected using the approach described exhibit significantly higher returns than the benchmark.