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Abstract
Knowledge about a company’s supply chain provides an edge for investors. In this article, the authors propose a new trading approach in which a company’s stock is purchased only if its main customer’s quarterly sales evolve favorably. This method yields backtested annual returns in excess of 8.7% to the market return, net of real world transaction costs for a stock portfolio built on supply chain considerations. This portfolio is practically uncorrelated with the market, and the abnormal return is robust for risk adjustment. The method is applicable at least to U.S.-listed small- and mid-cap product-manufacturing companies with a strong dependency on their main customer company. According to the authors, a review of past publications could not identify research applying a similar method, thereby confirming the novelty of this fundamental facts-based approach.
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