Return on Equity strategy returns 16% on average per year

Return on Equity (ROE) uses data items from both the income statement and the balance sheet.  Hence, ROE is a great example of a fundamental anomaly.  ROE is defined as income before non-recurring items (income statement) divided by the 4 quarter average of common stockholder’s equity (balance sheet).  Many fundamental data items that are reported by companies are contained in Research Wizard.  For this test, we used the predefined ROE item within Research Wizard and selected the companies with the top 10% of ROE ratios.

Using 4 week holding period returns, this strategy has produced a backtested annual average return of 16% from 2002-2010.  Here are the annual details:

High ROE S&P 500

2002    -11%          -22%

2003    51%            29%

2004    25%            11%

2005    13%             5%

2006    14%            16%

2007    15%             6%

2008    -46%          -37%

2009    62%            26%

2010 24% 15%

Avg      16%              5%

Furthermore, the compounded annual growth rate for this time period is 12% and the backtested results of $10,000 invested at the end of 2001 are below:

Since Research Wizard contains a wide variety of fundamental data, strategies like these can be easily tested in a matter of minutes.  Please click here to learn more about the screening and backtesting power of a stock research system built to help you identify winning strategies.


2 Responses to “Return on Equity strategy returns 16% on average per year”

  • Andy

    Interesting analysis. I cant see if the data is the trailing or forward ROE. Assuming the latter (given the performance) wondered whether its based on consensus estimates at the time or perfect foresight using subsequently reported data

    • krobbins

      Andy,

      Good question.

      The income item for this study is straight from the income statement. So it’s the sum of the last 4 quarters of income before non-recurring items. Therefore, it is not the forward earnings estimate. And of course, we would never present results based on “perfect foresight using subsequently reported data.”

      Research Wizard does have earnings estimates though, so you could also run this test with those instead of the quarterly reported data.

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