W h y s o m e c o m p a n I e s m a k e t h e
C u t 3 : From Companies to Companies
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| C u t 3 : From Companies to Companies Drawing upon the research database at the University of Chicago Center for Research in Securities Pricing (CRSP), we analyzed the cumulative stock returns of each candidate company relative to the general market, looking for the good-to-great stock return pattern. Any company that met anyone of the Cut elimination criteria was eliminated at this stage. Any company that met anyone of the following elimination criteria was I eliminated at this stage. Terminology used in Cut 3 elimination criteria T year Year we identified as the point at which performance began an upward trend-the "transition year" based on when the actual stock returns showed a visible upward shift. X period Era of observable "good" performance relative to the market immediately prior to the T year. Y period Era of substantially above market performance immediately following the T year. Cut 3 Elimination Criterion #1: The company displays a continual upward trend relative to the market over the entire time covered by CRSP data-there is no X period. Cut 3 Elimination Criterion #2: The company shows a flat to gradual rise relative to the market. There is no obvious shift to breakthrough performance. A pp end ix l.A 223 Cut 3 Elimination Criterion The company demonstrates a transition, but an X period of less than ten years. In other words, the average performance data was not long enough to demonstrate a fundamental transition. In some cases, the company likely had more years of X period performance prior to the transition year, but the stock became traded on the NASDAQ, NYSE, or during the X period therefore, our data did not go back far enough to an X period. Cut 3 Elimination Criterion #4: The company demonstrates a transition from terrible performance to average performance relative to the market. In other words, we eliminated classic turnaround situations where the company pulled out of a downward trend and into a trajectory parallel with the general market. Cut 3 Elimination Criterion #5: The company demonstrates a transition, but after 1985. Good-to-great transitions that occurred after 1985 might also have been legitimate good-to-great candidates. By the time we completed our research, however, we would not be able to verify that their fifteen-year ratio of cumulative returns to the general market met the three-to-one criterion. Cut 3 Elimination Criterion #6: The company shows a transition to increased performance, but the rise in performance is not sustained. After the initial rise, it goes flat or declines relative to the market until the time of consideration for selection into the study. Cut 3 Elimination Criterion #7: The company demonstrates a volatile pattern of returns-large upward and downward swings-with no clear X period, Y period, or T year. Cut 3 Elimination Criterion A complete set of CRSP data is not available before 1975, making it impossible to identify a verifiable X period often years. Cut 3 Elimination Criterion #9: There is a transition pattern, but the company demonstrated a period of such spectacular performance prior to the X period that there is substantial evidence that the company is a great company that had fallen temporarily on difficult times, rather than a good or mediocre company that became great. The classic example is Walt Disney. Cut 3 Elimination Criterion The company is acquired, has merged, or is otherwise eliminated from consideration as a standalone company by the time of the final Cut 3 analysis. Cut 3 Elimination Criterion The company shows a mild transition but falls short of three times the market. |