Net Income Screen

Investing Strategies Mechanical Investing
1

A paper by Hendrik Bessembinder: The Role of Net Income Growth in Explaining Long-Horizon Stock Returns by Hendrik Bessembinder :: SSRN](The Role of Net Income Growth in Explaining Long-Horizon Stock Returns by Hendrik Bessembinder :: SSRN) describes using Net Income growth to obtain excess returns. The paper does not describe the look back period or the holding period.

Are there any screens using Net Income Growth that have been developed for GTR1?

Extract from Introduction from paper.

This finding has naturally spurred interest in assessing which, if any, firm characteristics
are associated with outsized stock price performance. Bessembinder (2022) examines stock
market outcomes at the decade horizon, and reports that firms with the strongest stock market
performance tended to be those characterized by rapid rates of growth. In this paper, I further
investigate the variables that explain decade-horizon stock performance. I show that growth,
whether measured in terms of net income, total assets, or sales individually has strong
explanatory power, as excess annualized returns for stocks in the highest growth quintile exceed
those for stocks in the lowest growth quintile by between 13% and 29% per year. However,
average profitability also has important explanatory power.
A direct statistical “horserace” that considers all variables simultaneously shows that net
income growth is by far the strongest variable in terms of explaining decade-horizon stock
returns. Average profitability also contributes, while sales and asset growth have almost no
explanatory power in the horserace.

Craig

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Unless I missed something, the paper mainly demonstrates that stocks with the greatest returns over a given decade are generally those with the highest Net Income Growth over the decade. Hardly surprising. I can’t see that the paper says much about how to predict in advance what those stocks will be.

In developing or tweaking screens I generally prefer criteria based on sales growth rather than net income growth. Net income can go negative and even if it doesn’t net income growth is more variable than sales growth.

The TechGrowers screen by rdutt, requires high year over year sales growth for Computer Software / IT Services companies and seems to work well in bull market conditions.

Requiring positive year over year sales growth improved my version of ROE_cash a bit, but I have not systematically examined the addition of sales growth criteria to existing screens.

Best regards, Eric

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