Asset Growth Effect: Buying Low-Growth and Shorting High-Growth Stocks

Summary

The document describes a U.S. stock strategy that ranks non-financial NYSE, AMEX, and NASDAQ companies by the prior year’s change in total assets. At each June year-end, it forms ten equal groups, buys the lowest-growth group, and shorts the highest-growth group in an equal-weighted portfolio rebalanced annually. The cited research reports that low asset-growth stocks outperformed high-growth stocks, including among large-cap stocks, and that related evidence appears across 40 international equity markets. One cited U.S. study reports a 20% annual return premium over high-growth stocks across its sample period.

Explanations remain contested. Risk-based accounts link investment to changing exposure as firms shift from growth options to assets in place; behavioral accounts point to extrapolation, mispricing, and subsequent growth reversals. The page says the evidence does not settle these explanations. It also cautions that the strategy’s equity-market correlation is unknown, so its potential as a bear-market hedge requires rigorous testing. The reported findings are research results, not a guarantee of future performance.

Key ideas

• Rank eligible U.S. stocks annually by the prior year’s percentage change in total assets.
• Buy the lowest-growth decile and short the highest-growth decile, with equal weights and annual rebalancing.
• The cited studies report lower future returns for high asset-growth firms in U.S. and international markets.
• Researchers offer both risk-based and behavioral explanations, and the document describes the cause as unresolved.
• The strategy’s behavior during equity market crises is unknown and needs further testing.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.