Searching for the Sustainably Profitable Stocks: Evidence on S&P 500 Companies

Abstract

Using a balanced panel dataset of 214 firms from S&P 500 during 2001-2012, the main purpose of this study is to search for the possibility of the sustainably profitable stocks by utilizing a nonlinear panel smooth transition regression (PSTR) model. We document three important empirical findings on this study. First, we show that the concurrent total asset growth rate and the change in EPS positively correlate with the market adjusted stock returns, while one-year lagged market-to-book asset ratio (MBA) had negative impact on market adjusted stock returns. Second, we find that most value stocks remained in the same regime over the sample period and the annual average market-adjusted return of these value stocks is 7.80%, approximately 10.56% higher than growth stocks. Third, we further report that 116 valued firms in our sample are most likely to be sustainably profitable stocks over the entire sample period and the annual average market-adjusted return of these stocks is 6.53%. Especially now, with an investment environment that has been somewhat ungenerous in offering returns, we expect these interesting findings provide rich implications for institutional investors to design profitable and effective investment strategies.