The intuition behind SNOA as a filter is that firms with a high level of net operating assets, scaled to control for their size, indicates a lack of sustainability of recent earnings performance. An accumulation of accounting earnings without a commensurate accumulation of free cash flows raises doubts about future profitability. If investors have limited attention and fail to discount for the unsustainability of earnings growth, then firms with high net operating assets will be overvalued relative to those with low net operating assets. In the long run, such mispricing will on average be corrected. This implies that firms with high net operating assets will on average earn negative long-run abnormal returns, and those with low net operating assets will earn positive long-run abnormal returns. The whole paper is worth a read: Do Investors Overvalue Firms with Bloated Balance Sheets (pdf)
The idea is that you go long stocks with low SNOA and short stocks with high SNOA. Going past 5 years, here’s a list of stocks with a low SNOA:
NMDC [stockquote]NMDC[/stockquote]
ORISSAMINE [stockquote]ORISSAMINE[/stockquote]
MOIL [stockquote]MOIL[/stockquote]
ENGINERSIN [stockquote]ENGINERSIN[/stockquote]
INFY [stockquote]INFY[/stockquote]
INGERRAND [stockquote]INGERRAND[/stockquote]
OFSS [stockquote]OFSS[/stockquote]
OIL [stockquote]OIL[/stockquote]
NAUKRI [stockquote]NAUKRI[/stockquote]
COALINDIA [stockquote]COALINDIA[/stockquote]
And the ones with high SNOA:
HALONIX [stockquote]HALONIX[/stockquote]
ESL [stockquote]ESL[/stockquote]
VGUARD [stockquote]VGUARD[/stockquote]
HITECHPLAS [stockquote]HITECHPLAS[/stockquote]
TIRUMALCHM [stockquote]TIRUMALCHM[/stockquote]
TTML [stockquote]TTML[/stockquote]
BIRLAERIC [stockquote]BIRLAERIC[/stockquote]
BURNPUR [stockquote]BURNPUR[/stockquote]
SURANAVEL [stockquote]SURANAVEL[/stockquote]
DIGJAM [stockquote]DIGJAM[/stockquote]
Note: we ignored stocks that don’t had 5 years worth of statements.
When you combine STA (discussed earlier) and SNOA, you get to a place where you have filtered a vast majority of the universe. But there’s one more gatekeeper to discuss…