Fundamental Analysis: Combining the Search for Quality with the Search for Value

Using cross-sectional forecasts, we compare fundamental analysis strategies based on quality, such as FSCORE from Piotroski (2000) and GSCORE from Mohanram (2005), with strategies based on value, such as the V/P ratio from Frankel and Lee (1998) and the PEG ratio. We find that all four strategies generate significant hedge returns. Combining quality-driven (FSCORE or GSCORE) with value-driven approaches (V/P or PEG) leads to a significant increase in hedge returns that holds for a variety of partitions, persists over time, and is robust after controlling for risk factors and portfolio size. The results suggest a powerful method to conduct fundamental analysis that combines quality-driven and value-driven approaches, and have important implications for academic research on fundamental analysis as well as for practitioners in their elusive quest for alpha generating strategies.