Do High ROE Stocks Outperform the Market with Persistence: An Empirical Analysis, 2009 - 2014

Academic studies by Eugene Fama and Kenneth French as well as Robert Novy Marx identify profitability as one of the factors determining the variation in excess returns in the cross section of stock returns. Using return on equity (ROE) as my measure of profitability and the S&P 500 as my universe of stocks, I examine the impact of ROE on S&P 500 stock performance for the period 2009 - 2014. I test the following hypotheses with respect to ROE: (1) Portfolios of firms with high ROE\u27s (40% or higher) outperform the market with persistence i.e. over long periods of time, (2) Growth firms with high ROE\u27s outperform value firms with high ROE\u27s, (3) Portfolios of high ROE firms outperform portfolios of low ROE firms.https://ecommons.udayton.edu/stander_posters/1715/thumbnail.jp