Group 1 – Low Beta/High Interest Coverage
Team 1 decided to invest in stocks with low beta and high-interest coverage ratio. The interest coverage ratio is defined as EBIT or (“Operating Profit”) with Interest Expense. It acts as a proxy for how well the firm can pay interest on its outstanding debt. During the pandemic, companies loaded up on “cheap” debt. Firms with healthy operating profits and conservative debt burdens are expected to better weather rising interest rates and the pressures of a recessionary environment. Further, as we enter a potentially volatile market, a low beta could help shield the portfolio from a downturn, and the company’s ability to adequately manage its debt payments could also provide added downside protection.
Group 2 – High Dividend/ Low Leverage
Team 2 chose High Dividend Yield/Low Leverage strategy as dividends payouts are often a signal that a company is healthy and producing enough cash flows to sustain profitability in the future. Higher dividend yield is indicative of higher future returns. Companies with low leverage are less impacted by high interest rates and more capable of paying down debts in case their cash flows decrease.
Group 3 – Net Income Growth
Team 3 borrowed a strategy published by professor Hank Bessembinder in august of 2022. In this strategy we calculated decade horizon net income growth for each firm and invested in the firms that experienced the largest percentage growth. We invested in the top 30 stocks equal weighted with a market capitalization of over $500M inflation adjusted to 1980.
Group 4 – Winsorized Low Beta
Team 4, inspired by the work of our professor, Ivo Welch, decided to implement a neglected beta strategy. This strategy attempts to capitalize on the low beta anomaly. The low beta anomaly is the conundrum that higher beta stocks should have higher overall returns according to the CAPM, but empirically, low beta stocks tend to outperform. Based on a paper from Professor Welch, the team winsorized daily market returns to -2 and +4 times the contemporaneous market rate of return. Beta was calculated using these winsorized returns and the top 20 stocks with the lowest calculated beta were chosen in an equal weight. We restricted out universe to the top 3000 US exchange traded stocks by market cap and removed SPACs.