SUPER STOCKS AND STUPID STOCKS

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Chapter 7

• SUPER STOCKS AND STUPID STOCKS

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Introduction

• Risk in the Returns
• Fama and French
• Three Betas for the Portfolio
• Risk in the Corporate Profile
• What the Charts Show
• Super Stocks vs. Stupid Stocks
• Afterthoughts

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Risk in the Returns

• Examine distributions of decile returns
• Decile 1 and 10 show evidence of negative
  skewness
• Look at Figure 7-1 on page 69

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Fama and French

• FF risk-adjust by relating a portfolios monthly
  returns to three factors
• Market
• Size
• Value and Growth

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Three Betas for the Portfolio

• Sensitivity to market returns
• Sensitivity to the relative performance of small
  and large stocks
• Sensitivity to the relative performance of value
  and growth stocks

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Conclusion - Risk in the Returns

• The return differentials in the deciles is not
  cased by the FF risk factors

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Risk in the Corporate Profile

• Stock volatility feeds on change
• Figure 7-2, page 71
• Going from decile 1 - 10, the firms have
  progressively less debt
• Hence, the firms of decile 10 are in much better
  financial shape than the firms of decile 1

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What Do the Charts Show?

• The firms of decile 10 are in better financial
  shape than those of decile 1
• Right hand deciles are more profitable now
• Left hand deciles are unprofitable, are losing
  money now, and their earnings have been declining
  over the past 5 years

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Super Stock vs. Stupid Stock

• Stocks that are big, liquid, financially sound,
  low-risk, momentum in the market, profitable in
  every dimension, and becoming more profitable in
  every way.
• Yet they still sell at dirt-cheap market prices.

• Stocks that are relatively small, illiquid,
  risky, financially shaky, have negtive momentum,
  unprofitable now and getting worse.
• Yet are selling at high prices relative to
  current sales, cash flow, and earnings

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Haughens Afterthoughts

• In a truly efficient market the stocks of decile
  1 would not be mixed with the stocks of decile 10
  as the market would be able to adjust
  accordingly.
• We wouldnt necessarily see the more expensive
  stocks in the lower deciles, but we wouldnt
  expect to see the cheaper stocks and the more
  expensive stocks in the upper deciles together.

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