Folks
Ran a small and easy experiment
Hypothesis: Does stock with underperformance in short to medium term tend to outperform in future ?
To check this hypothesis I’ve used a simple screener with just 1 condition. The results below
| Screen | No, of stocks | Returns after the underperformance | |
|---|---|---|---|
| Market Cap 1 years ago < Market cap 3 years ago | 3619 | 37.21 | ← return over last 1 years |
| Market Cap 1 years ago > Market cap 3 years ago | 172 | 3.48 | ← return over last 1 years |
| Market Cap 3 years ago < Market cap 5 years ago | 2911 | 39.06 | ← return over last 3 years |
| Market Cap 3 years ago > Market cap 5 years ago | 599 | 29.06 | ← return over last 3 years |
| market cap 5 years ago < market cap 10 years ago | 624 | 25.77 | ← return over last 5 years |
| market cap 5 years ago > market cap 10 years ago | 2082 | 18.12 | ← return over last 5 years |
Remarks: The screening is for all available stocks in screener as of 19 Jan 2024. No other filter other than what’s mentioined. Median is considered instead of mean to remove bias caused by outliers
Conclusion:
- The data shows that the chances are outperformance is better when the stock didn’t give any returns in recent past
- This tend to work better when the looked at a smaller timeframe. May not work so well for longer time frame. Outperformance for 1, 3, 5 years periods are 34%, 10%, 7%
- The possible reason for underperformance could be cyclical downturn for a co in earning and valuation. The trend reverses and leads to outperformance in earnings and/or valuations. This can’t be inferred directly from the data but a possibility
Disc: Just sharing my conclusion. Not a reco to take any action based on this
