Ebook: Value Stocks beat Growth Stocks: An empirical Analysis for the German Stock Market : An empirical Analysis for the German Stock Market

Based on a 'free of survivorship-bias' sample of German stocks listed at the Frankfurt stock exchange, the study investigates the ability of hedge portfolio formation structures, built of three value premium proxies (P/B, P/E, and DY), the size factor, and the technical momentum factor, to generate excess returns in the period 1992 to 2011. First, the author characterizes and defines the significant terms that are in connection with value and growth investing. He continues with the discussion of asset pricing with the CAPM, the Fama and French three-factor model, and the Carhart extension, and then describes the expected stock returns that are of capital importance. Moreover, the author deals with related studies for the German stock market. He gives a detailed description of the empirical analysis before he draws his conclusions. The author's purpose is to answer the following core questions: Is there a value premium in the German market between 1992 and 2011? Is there a reversed size premium like recent empirical findings suggest? Do high momentum stocks perform better than low momentum stocks? Is there a significant seasonal pattern in hedge portfolio returns? The combination of which factors best explains expected stock returns? Auszug aus dem Text Text Sample: Chapter 2.2, Growth investing: Growth companies or glamour firms have a stronger past performance than the average company and are expected to perform very strong in the future. According to Benjamin Graham '[t]he term 'growth stock” is applied to one which has increased ist per-share earnings in the past at well above the rate for common stocks generally and is expected to continue to do so in the future.” Growth investors believe that these high growth companies would enable them to outperform the stock-market in the long run. The market is willing to pay more for growth stocks, since these are leading companies with the potential for fast earnings growth, and may thus be worth considerably more in the future. Philip A. Fisher is regarded the forerunner in the field of growth investing. Beside the fundamental analysis, he also focused on qualitative aspects of a company like management ability, risk management, innovation and business strategy. Intangible assets like the brand-name and the goodwill of a firm became important. Fisher extended the number of value investing candidates by emphasizing that also cheap stocks can be unprofitable investments, in fact, if the stock trades below ist intrinsic value because of bad management. Simultaneously, the high potential of growth stocks bears the danger that expectations will be disappointed. The demand for growth stocks arised, above all, in the late 1990s with the internet boom. There were numerous initial public offerings (IPO’s) of companies with very high earnings growth expectations. In the German market, a well-known case is the case of EMTV. The German media company was issued on the 'Neuer Markt” platform for a price of 35.50 Deutsche Mark (DM) (adjusted for various share splits: 0.35 EUR) in October 1997. In the beginning of 2000 the stock peaked at a price of 120 Euro (EUR). This meant a gain of over 30,000 percent since the IPO. In 1999, the company generated sales of DM 317 million (m) with 220 employees, whereas the market value exceeded DM 15 billion (bn). At this point of time, EMTV was valued as high as the Deutsche Aktienindex (DAX) company Lufthansa and had a very high P/S ratio of approximately 22. In the mid of 2000 the decline of the stock started and in April 2003 the Chief Executive Officers (CEO’s) were convicted to pay high fines due to wrong presentations of the condition of the company. EMTV was not the only company that failed to achieve the high expectations. After the burst of the 'dot-com bubble”, a lot of companies of the so-called 'New Economy” went bankrupt. A similar phenomenon, happening at the moment, is the IPO of the social network Facebook. Since the first listing on May 18, the stock declined from USD 38 to USD 26.81, a minus of approximately 30 per cent. This means a decline in the market value of USD 34.5 bn in a few weeks. On 7 June 2012, the company trades at a 2012 P/E of 49.27 and a 2013 P/E of 41.20. These high ratios are reminiscent of the 'Neue Markt” valuations. A growth-oriented investor sets the future in the foreground. Not the current sales or earnings are important, but the expectation of strong sales- and earnings growth. Hence, growth stocks are characterized by high P/B ratios, high P/E ratios and low dividend yields. Growth stocks trade with a growth premium. An extreme example for growth investing would be the investment in a start-up company. These companies have typically a low amount of assets and often negative earnings, but have at the same time a high potential for growth. Positive examples of recent growth companies are Apple and Google. The future will show, if Facebook becomes a 'second Google” or a 'second EMTV”. Biographische Informationen Christian Schießl was born in Traunstein, in 1986. After studying at the Ludwig-Maximilians-University Munich (Bsc), he successfully completed his master's degree in banking and finance at the Otto-Friedrich-University Bamberg. His passion for stock markets has evolved from his early youth. The majors in his studies and the professional experience as an equity analyst caused the motivation for this study.