Earnings Distortion: The New Value Factor

Idiosyncratic Alpha from Proprietary Data

Below, we present trading strategies for monetizing our proprietary research on Core Earnings and Earnings Distortion.

Earnings Distortion is orthogonal to all currently known value and profitability factors.

Core Earnings + Earnings Distortion = Net Income

Only our unrivaled analysis of footnotes in 10Ks, 10Qs and 8Ks produces the proprietary fundamental data required to derive Core Earnings and Earnings Distortion.

Proof that our data is novel, proprietary and alpha-generating is documented in this short video and this white paper: Core Earnings: New Data & Evidence, featured in The Journal of Financial Economics.

See the growing body of evidence that legacy research is flawed and unreliable: Lost In Standardization: Effects of Financial Statement Database Discrepancies on Inference and Do Managers Define Non-GAAP Earnings to Meet or Beat Analyst Forecasts?

Get the Data

ExtractAlpha presents a long/short dollar-neutral strategy:

  • 10.1% annualized return and Sharpe ratio of 1.44
  • 9.3% annualized return net of Fama-French 5 factors, momentum, short-term reversal, and 12 sectors.

Get more details here. Download the paper and fact sheet.

CloudQuant presents long-short and long-only strategies:

  1. The dollar-neutral long-short portfolio returned 60% over 10 years with a Sharpe Ratio over the last five years of ~1.
  2. The long-only portfolio outperformed the S&P 500 index by an average of 4% per annum over 10 years and averaged 18.4% per annum.

Get more details here.

AltHub presents two smart beta and one ESG strategy:

  1. Earnings Distortion S&P 500 Smart Beta Portfolio: 10-yr annualized return of 13.9% vs 12.1% for the S&P 500 with a Sharpe Ratio of 0.97.
  2. Earnings Distortion ML Model S&P 500 Smart Beta Portfolio: 3-yr annualized return of 18.2% vs 13.7% for the S&P 500 with a Sharpe Ratio of 0.82.
  3. Truth Stocks (Companies without Earnings Distortion) Portfolios:
    1. S&P 500 Universe: 10-yr annualized return of 16.8% vs 12.8% for the S&P 500 with a Sharpe Ratio of 0.7.
    2. Russell 3000 Universe: 9.5-yr annualized return of 28.4% vs 12.6% for the S&P 500 with a Sharpe Ratio of 1.

Get more details here.