Combining Value Investing with Quality Investing: Empirical Evidence from the European and Nordic Stock Markets

Abstract: The aim of this thesis is to explore whether stock selection based on five value metrics and six quality metrics can generate superior returns compared to the overall market. The selected markets are the Nordic one (Nasdaq OMX Nordic 120 being the benchmark) and the European one (STOXX Europe 600 being the benchmark), while the selected time period is 2001-2023 for Europe and 2010-2023 for the Nordics. The selected value ratios are price-to-book (P/B), price-to-earnings (P/E), price-to-cashflow (P/CF), EV-to-EBIT (EV/EBIT) and EV-to-EBITDA (EV/EBITDA), while the selected quality metrics are ROIC, ROIC (5yr average), ROA, gross profitability, Grantham's quality score and dividend yield. Then, combined value and quality portfolios are created with the objective to test whether such combinations generate superior performance compared to the two sets of strategies stand-alone. The performance of all these portfolios is assessed by means of two risk-adjusted performance metrics, namely Sharpe ratio and Sortino ratio, and of the Fama French five-factor pricing model. A couple of key findings are that in both markets (1) quality portfolios have been superior to their value counterparties, especially from a risk-adjusted perspective, and (2) combining value with quality clearly tends to improve both absolute and risk-adjusted performance with respect to value-only portfolios.