Quantitative Strategies for Achieving Alpha (McGraw-Hill Finance & Investing)

481 Pages·2008·11.33 MB·English

by  Richard Tortoriello

QUANTITATIVE
STRATEGIES
FOR
ACHIEVING
A L P H A
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QUANTITATIVE
STRATEGIES
FOR
ACHIEVING
A L P H A
R
ICHARD
T
ORTORIELLO
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Copyright © 2009 by Richard Tortoriello. All rights reserved. Except as permitted under the United States Copyright Act of 1976,
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ISBN: 978-0-07-154985-1
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To Theresa M. N., who always thought her son would become
an author, but never imagined a book like this.
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C O N T E N T S
Acknowledgments xi
List of Abbreviations xiii
Chapter 1
Introduction: In Search of Alpha 1
Quantitative versus Qualitative Analysis 3
Toward an Integrated Model of Investment Analysis 7
The Concepts Used in This Book 8
Chapter 2
Methodology 11
The Database 13
The Backtest Universe 15
Portfolio Returns and Holding Periods 16
How the Tests Are Structured 19
The Excess Returns Tests 23
The Backtest Summary Table and Graphs 23
How to Identify a Strong Quantitative Strategy 27
How to Use the Backtest Summary and Graphs 28
The Sector Tests 30
The Sector Summary Tables and Graph 32
Epilogue: Why Aren’t We All Rich? 34
Chapter 3
The Day-To-Day Drivers Of Stock Market Returns 37
The Methodology Used in this Chapter 39
Earnings Growth Drives Stock Market Returns 42
vii
viii Contents
Sales Growth Also Drives Returns 44
Earnings Growth Is the Stronger Factor 47
Free Cash Flow Growth: The First Predictive Basic 48
Earnings Surprises Signal Changes in Investor Sentiment 49
Earnings Growth and Investor Sentiment 53
Summary 57
Chapter 4
Profitability 59
Return on Invested Capital 61
EBITDAMinus Capital Expenditures to Invested Capital 70
Return on Equity and Return on Assets 79
Economic Profits 87
Summary 99
Chapter 5
Valuation 103
Free Cash Flow to Price 105
Enterprise Value to EBITDA 113
Price to Earnings 122
Enterprise Value to Sales 131
Dividend Plus Repurchase Yield 136
Price to Book Value 138
Summary 147
Chapter 6
Cash Flow 151
Free Cash Flow to Operating Income 153
Cash Return on Invested Capital 161
Free Cash Flow Plus Net Share Repurchase Plus Dividend to Price 171
Summary 178
Chapter 7
Growth 181
Free Cash Flow per Share Score 184
Earnings per Share Score 192
Two-Year Average Capital Expenditures per Share Growth 202
Summary 208
Contents ix
Chapter 8
Capital Allocation 213
Share Repurchases and Share Reduction 217
One-Year Reduction in Long-Term Debt 227
External Financing to Assets 235
Three-Year Average Capital Expenditures to Invested Capital 246
Acquisitions to Invested Capital 251
Summary 256
Chapter 9
Price Momentum 259
Relative Strength 262
52-Week Price Range 275
Relative Strength Index 283
Summary 291
Chapter 10
Red Flags 295
Financial Leverage and Debt Payback 296
Capital Expenditures to Property, Plant, and Equipment 305
Operating Cash Flow to Capital Expenditures 310
One-Year Change in Inventory Plus Receivables Turnover 317
Depreciation to Invested Capital 322
Summary 329
Chapter 11
Collected Wisdom 333
The Art of Investment 334
Mosaics: Toward a Quantitative View of Investing 336
Chapter 12
Combining The Factors 347
The Strongest Building Blocks 348
The Strongest Two-Factor Combinations 351
Factors That Work Together—and Why 354
Suggestions for Combining the Strategies 360
Three-Factor Tests 362
AMultifactor Model 366