Bridge over ocean
1 May 1994 Financial Analysts Journal Volume 50, Issue 3

Excellence Revisited

  1. Michelle R. Clayman, CFA
"Good" companies do not necessarily make good investments. A portfolio of "unexcellent" companies (chosen on the basis of financial ratios) outperformed the S&P 500 by 12% per year from 1981 to 1985, whereas a portfolio of "excellent" companies outperformed the index by only 1% per year. Over the 1988 - 92 period, once again, the "good" companies' financial ratios deteriorated while the "poor" companies' ratios improved. As investment portfolios, however, the good companies outperformed the S&P 500 over the period, producing a monthly alpha of 0.38%. The poor companies underperformed, producing a monthly alpha of -0.07%.There appears to be a tradeoff between growth and profitability versus valuation ratios. While good companies do not necessarily make good investments, the market appears to reward profitable companies selling at reasonable multiples.
Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.