Falling Knives: Extreme Value Investing
Economics, Finance, & Quantitative Analysis
We identified 979 stocks with year-ending losses of 60 percent or more during the 1993-2002 period. Post-fall returns extended our analysis through 2005. Unlike previous research, we screened our "falling knives" for financial strength to promote a greater likelihood of recovery and minimize any survivorship bias. When we added the constraint of Altman Z-Scores > 3.0, our data set shrank to 790 stocks and produced two-year and three-year average annual returns that tripled their market counterparts.
Kochman, Ladd, and James Tompkins. "Falling Knives: Extreme Value Investing." Southern Business & Economic Journal 31.3 (2008): 43-7. Print.