Sorting Out the Winners in the Low Price-to-Book Stock Universe

    by Wayne A. Thorp

    There is a mountain of academic research pointing to the long-term success of value-based stock selection methodologies. Such value strategies typically seek stocks with low prices relative to variables such as earnings, book value, cash flow, or dividends.

    One “flaw” in most of this research, however, is that it often relies on constructing large portfolios to beat the market in order to prevent a few large losers from sabotaging portfolio performance.

    While many individual investors attempt to diversify their portfolios, such large-scale diversification is unrealistic. However, research by Joseph Piotroski—an accounting professor at the University of Chicago Graduate School of Business—suggests that is it possible to establish basic financial criteria to help separate the winners from the losers in a low price-to-book-value stock universe.

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