Can Investors Benefit from Using a Simple Fundamental-Based Stock Selection Strategy?

Abstract: This paper examines Piotroski's (2000) fundamental-based F-Score strategy, on the Stockholm Stock Exchange between 1996 and 2017, to investigate: (1) if the strategy can identify future over- and underperformers, and (2) if this information constitute a market inefficiency over the most recognized common risk factors. We find that the strategy is overall successful, with an average annual return of 17 percent and a mean market-adjusted return of 8 percent. Moreover, several tests indicate that the strategy can separate future over- and underperformers, which is strongest for stocks with high book-to-market values. In contrast to previous research, the benefits of the strategy are not limited to small- and medium sized firms, which reduces concerns about feasibility. Importantly, the ability to identify future over- and underperformers are intact after adjusting returns, using Fama and French's (1993) three factor model. Thus, since risk fails to explain a majority of the high returns, our findings indicate the existence of long-term market mispricing.