In The Absence of Value, Investors Opt for Trash

In The Absence of Value, Investors Opt for Trash

SocGen Global Quantitative Research analysts Andrew Lapthome and Georgios Oikonomou look at how September fared across the various popular investment screens and come up with some interesting findings.

Investment screens: The flight to trash

Even though equity markets had one of the best Septembers ever, investors seemed to be scraping the barrel – plumping for low quality and weak balance sheet names due to a dearth of quality or value companies.

Ironically, the strong market performance hitherto has led to a fall in the number of eligible candidates that show up on the screens – only 21 deep value and 25 quality companies appear, that is 46 candidates in all, compared to 53 last month and 200 in the same period last year.

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1-shrinking-population investment screens

The resulting flight to trash meant that low quality companies showed excellent returns in September.

Merton model

Companies with weak balance sheets as screened through the Merton model appreciated by 10% on a global basis.  The ‘Good’ versus ‘Bad or Ugly’ battle clearly swung the latter’s way – globally, companies with weak balance sheets outperformed the healthy ones by 5.3%. In Europe this percentage was 8.9%, and 9.9% in Japan.

2-merton investment screens

Piotroski model

The Piotroski model confirmed this unsavory trend: the ‘Bad or Ugly’ outperformed the ‘Good’ companies by 5% in Europe and 18% in Japan.

2-piotroski investment screens

Even though low quality was the flavor of the month, the companies thrown up on the Quality & Income screen did quite well too, though the Greenblatt Value screen ended in the red with -2.9%.

4-quality-income investment screens

5-greenblatt investment screens

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