Style Investing: Incorporating Growth Characteristics in Value Stocks

Abstract:     
Several empirical studies show a systematic relationship between stock characteristics (size, earning yield, dividend yield, etc.) and stock returns. The previous studies, that show stocks with high earnings yield produce superior returns use univariate measures (such as E/P or B/P) to classify stocks into value or growth stocks. This paper shows that the traditional method of classification ignores instances when value and growth investing strategies instead of being mutually exclusive can complement each other in selecting superior performing stocks. Growth in EPS provides a more meaningful way to capture growth than using a measure of low E/P ratio. A strategy focusing on investing in stocks that have the dual characteristics of a high E/P ratio and high growth in EPS outperforms a strategy of high E/P alone. The study also documents some evidence of persistence in performance for stocks having the dual characteristic of high growth in EPS and high E/P ratio.

Keywords: Value and growth investing, style investing

JEL Classifications: G1

Working Paper Series