10 June 2007

Prof. Mohanram's Research: NYT Article

In an article by Barry Rehfeld, today's New York Times reports on research showing that grading companies by their financial parameters can identify future stock gainers and (even more successfully) companies that will under-perform the market.

As this type of quantitative grading, of course, is our own humble objective, we're thrilled to see rigorously compiled evidence that we might be on the right track. We will pore through the research to see how we can incorporate the results into our gauges to make them better predictors of the future.

In this case, the research was conducted by Prof. P.S. Mohanram at Columbia University. The results were published in the Review of Accounting Studies in a paper entitled, " Separating Winners from Losers among Low Book-to-Market Stocks using Financial Statement Analysis."

Mr. Rehfeld summarized Prof. Mohanram's key finding as "stocks whose book value (assets minus liabilities) is much lower than their market value are unlikely to fare well."

We compute Price/Book Value every quarter for each company we evaluate, but we haven't used the data to influence the Value gauge. In a knowledge-based economy, where the key assets are intangible, we had doubted this relevance of the classic Price/Book ratio. We will reconsider.

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