Work detail

Quality Investing: Combining the Gross Profitability with the Free Cash Flow Yield

Author: Mgr. Jiří Dopita
Year: 2016 - summer
Leaders: Mgr. Iuliia Brushko M.A., Ph.D.
Consultants:
Work type: Finance, Financial Markets and Banking
Masters
Language: English
Pages: 75
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/166389/
Abstract: This thesis examined the predictive power of different strategies for future stock returns. The
analysis was conducted using a data sample of 3976 firms traded on the New York Stock
Exchange (NYSE) and NASDAQ during a 29 year time horizon, from July 1986 to June 2015.
Predictive powers of different strategies were also tested during three sub-periods and during bull
and bear markets using both long-only and long/short portfolios to check whether the predictive
power is robust. It was found that the FCF yield is a better indicator of future stock returns than
the gross profitability. The difference between average monthly returns was significant during all
tested time periods and market situations using both long-only and long/short portfolios. The
newly introduced FCF profitable value strategy proved to be a better predictor of future stock
returns than the profitable value strategy. The FCF profitable value strategy presents also an
improvement over the FCF yield strategy. It was found that the FCF profitable value has a better
predictive power for future stock returns than the FCF yield at least during some time periods or
market situations.
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