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

Core Earnings + Earnings Distortion = Net Income

Idiosyncratic Alpha: 10% CAGR with 1.44 Sharpe Ratio

To enable managers to easily monetize our new factor, we present a long/short market-neutral strategy that generates impressive performance from 2015-2021:

  • 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 the details in the paper and fact sheet prepared by Vinesh Jha and Yunan Liu at ExtractAlpha.

Get the full Paper

Get the 1-Page Fact Sheet

Proprietary Data: Never Available to the Market Before Now

Core Earnings: New Data & Evidence, a new paper in The Journal of Financial Economics, unequivocally proves that the market does not impound the earnings impact of our proprietary analysis of footnotes disclosures.

Professors from Harvard Business School (Charles Wang and Ethan Rouen) and MIT Sloan (Eric So) wrote the paper. Here are a few quotes:

“market participants are inefficient in impounding the implications of non-core earnings, especially those stemming from the footnotes of the 10-K, into stock prices.” – pp. 34, 3rd para.

“Core Earnings contains information about future performance that is incremental to Street Earnings” – pp. 29, 2nd para.

Get a summary of the 70+ page paper here.

Conclusion

This new factor and our Core Earnings data merit your attention because they

  1. Generate significant, scalable and idiosyncratic alpha, and
  2. are based on proprietary data.

Expect more papers that show how quantitative and fundamental portfolio managers can leverage our proprietary Core Earnings data to generate more alpha and improve their performance.

This article originally published on August 20, 2021.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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Click here to download a PDF of this report.

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