Strategy Library
GScore Investing
Introduction
Analyzing a company’s fundamentals is a method of trading that doesn’t rely purely on price and volume data. We will apply the use of computers to automate the analysis of this data, and we will do so using a method of Factor Investing, the process of using different attributes, in this case, fundamental data, to choose stocks to purchase. More specifically, we will use GScore investing, and evaluate companies on seven factors that we will detail later. We specifically choose companies with BooktoMarket due to abnormal returns as a result of the Risk Premium Effect.
Method
We first sort all companies that have fundamental data by their BooktoMarket ratio, and narrow our universe to the bottom quartile. We measure the BooktoMarket ratio using fine.FinancialStatements.BalanceSheet.NetTangibleAssets.TwelveMonths divided by fine.MarketCap. In this strategy, we will use Technology as the industry of choice, thus, we further narrow this universe to Technology stocks only.
For each of the conditions that are described below, if met, one point will be added to the GScore. Thus, with seven factors, our GScore can range from 0 to 7. We evaluate a company based on the following:

The Return on Assets (ROA) is greater than the contemporaneous industry median. In other words, the ROA for
the analyzed company is greater than the median of the ROAs of all companies in the same industry
We measure this value using fine.OperationRatios.ROA.OneYear 
The Cash Flow Return on Assets (CFROA) is greater than the contemporaneous industry median
We measure this value using fine.FinancialStatements.CashFlowStatement.OperatingCashFlow.TwelveMonths divided by fine.FinancialStatements.BalanceSheet.TotalAssets.TwelveMonths  The CFROA is greater than the ROA

The Variance of the ROA (VARROA) is lower than the contemporaneous industry median
We measure this by storing the past twelve values of fine.OperationRatios.ROA.ThreeMonths in a RollingWindow and computing the variance of the values in the RollingWindow 
The Research and Development Expenditure (R&D) is higher than the contemporaneous industry median
We measure this using fine.FinancialStatements.IncomeStatement.ResearchAndDevelopment.TwelveMonths 
The Capital Expenditure (CapEx) is higher than the contemporaneous industry median
We measure this using fine.FinancialStatements.CashFlowStatement.CapExReported.TwelveMonths 
The Advertisement Expenditure (Ad) is higher than the contemporaneous industry median
We measure this using fine.FinancialStatements.IncomeStatement.SellingGeneralAndAdministration.TwelveMonths
The fundamental data used in our algorithms is sourced from MorningStar, and to read more about our fundamental data, please visit the Fundamentals section of our documentation.
Once we have computed the GScores for each of the securities, we long the securities with GScores of 5 or higher.
Results
Since we use Technology as the industry, we decided to use Nasdaq100, or ^NDX, as the benchmark, which we track using the QQQ ETF. Our algorithm achieves a Sharpe Ratio of 0.778 from April 2016 to September 2020, and so it is outperformed by simply holding QQQ, which yielded a Sharpe Ratio of 1.22 over the same period.
References
 Mohanram, Partha S., Separating Winners from Losers Among Low BooktoMarket Stocks Using Financial Statement nalysis (April 2004). Online Copy.
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