Profitability vs. Growth - A Study of Investor Preference

Sammanfattning: Purpose: The thesis purpose is to examine how investors values differences in sales growth and profitability, as well as reacts to reported changes in these variables. In addition, the authors evaluate whether it is possible to earn abnormal returns, using Jensen´s alpha, by investing in stocks after reported improvements in these variables. Methodology: Due to the quantitative nature of the thesis, the authors have chosen a positivistic approach. The authors use an independent one way ANOVA (analysis of variance) test in order to compare price-to-book ratios amidst different categories of stocks, and see how investors values differences in growth and profitability. In addition, Jensen´s alpha is retrieved for all stocks before and after reported changes in these variables in order to observe when these changes are incorporated within stock prices. Conclusions: In line with previous research, stocks are priced in accordance with what drives values in companies. In addition, profitability is preferred over growth as value driver. Investors can predict changes in the examined variables quite well and price effects of improvements or deteriorations of the variables are incorporated at least one year prior the changes. Earning abnormal returns, buying stocks ex post the move is possible but difficult. This is due to the inconsistency of the return in the portfolios that will earn abnormal return.