Finding Alpha In Earnings Season's Rubble
The market was angry this quarterly earnings season, my friends. Like an old man trying to send back soup at a deli. In this edition, we bid adieu to 2018 with a look back at the last quarter and what we learned from market volatility. Also, product news and how to better weather stormy earnings in the future.
our breadth
x
your depth = alpha
canalyst newsletter: f inding alpha in earnings season’s rubble
In this edition, we bid adieu to 2018 with a look back at the last quarter and what we learned from market volatility. Also,
product news and how to better weather stormy earnings in the future, plus the Canalyst Holiday Quiz. Here’s to a fresh start in
2019 and a Happy New Year to all our readers!
The market was angry this quarterly earnings season, my friends. Like an old man trying to send back soup at a deli. When
market volatility increases and investors become more skittish, earnings season takes on even greater importance. With almost
all major markets in the midst of corrections, the usual weighing and sorting of quarterly results becomes a downright vicious
process. Anecdotally, it is easy to express feelings like “in this market, you better not miss,” and “even for winners, it’s a reminder
or excuse to sell,” but we thought we’d take a quick look at how this played out quantitatively.
As shown above, there was significantly more negative skew this earnings season vs. last. The sum of the three negative
probabilities was 36% this earnings season vs. 32% in August, and most notably doubling the number of most severe
occurrences (4% chance of >20% vs. 2% in August).
So, what to do about this? When markets approach these highly bearish levels of sentiment, the fundamental analyst or portfolio
manager’s instinct is to concentrate on his or her highest conviction names. This is a rational practice, as these tickers are the
ones where they most likely have an edge, and can lead to significant outperformance when sanity returns. Still, there’s a limiting
factor to this practice. Maybe your 3% weights become 4%, or 4% becomes 5%, but what about the rest of your portfolio?
In these times, the increased value of having a sizable watchlist or shadow-coverage universe is apparent. First, with more of
those >20% blowups occurring, there’s more alpha to find when sifting through this earning season’s rubble. Moreover, there’s a
good quantitative reminder that these times call for more stocks in your portfolio, not fewer. When macro fears rule markets like
today (trade war turmoil, inverted yield curve fears, peak profit perils, etc.), the common complaint is “all stocks move together.”
The euro-crises of the early 2010s gave us a name for this; “risk-on risk-off,” but it’s more accurately described as greater pairwise
stock correlations.
Dusting off our CFA portfolio math, we show the following simple example:
Here, we assume that that stock correlations rise from 0.6 to 0.7, but show that you can combat this by adding more names to
your portfolio, resulting in the same standard deviation.
Bottom line, apart from your handful of monster bets that you can add weight to, make it your upcoming New Year’s Resolution
to add more breadth to your portfolio. So, finish your tax loss trims, make the necessary rounds at the in-laws holiday parties,
then pour yourself a tall glass of eggnog and fire up the Canalyst portal. Our model database of 4,000+ companies has you
covered for 2019.
Regardless of market conditions, updating models has never
been an analyst’s most valuable use of time. Saving our clients
time by keeping our model database updated was a good
start, but we heard from our clients that they wanted to carry
updates through to their own customized models. So we built
new software, and call it the Canalyst Updater. Now, you can
customize any Canalyst model and then automatically import
the latest reported financial results during earnings season while maintaining your own customizations and forecasts. Plus, you
can now generate a comparison report which shows your forecasted numbers vs. actual reported numbers. Our latest version –
easy to use and lightning fast – is being rolled out in January as a part of a suite of new tools. Ask your rep about implementing
it into your process, or
request a demo
today, and see for how much better next earnings can be.
James Rife
Canalyst, Head of Equities
Prior to founding Canalyst, James had 10 years’ experience in equity research and portfolio management. He started his career in
equity research with Fidelity Canada’s investment team, covering sectors including Utilities, Forestry, Technology, and Energy from
2006 to 2010. After Fidelity, he took a role as Portfolio Manager at a Boston-based $1B long/short fund, rounding out his experience
across most other sectors in the process.
James holds a Bachelor of Commerce from the University of British Columbia and is a recipient of a Leslie Wong Fellowship from
UBC’s Portfolio Management Foundation, and is a CFA Charterholder.
Interested in learning more about how you can uncover more investment opportunities with Canalyst financial models?
Click here for a free trial
.
Copyright © 2018 Canalyst, All rights reserved.
looking back at a volatile quarter
looking forward to next earnings
In early December we launched the inaugural Canalyst
Holiday Quiz, and had a ton of fun challenging our
friends in the financial community to 18 brain teasers
for 2018. While the prizes have already been awarded,
see how you compare to some of the smartest minds in
the industry. (Because bragging rights really is the top
prize.)
Take the quiz
.
As Canalyst continues to grow, we’re looking for bright
talent. If you know anyone who is passionate about
stocks or technology – or both, please send them to
the Canalyst careers page for
current job openings
.
Midtown uniform optional.
holiday quiz
we
’
re hiring
6
7
8
9
What can you put between a
5 and a 6 so that the result is
greater than a five, but less
than a six?
5
What's next in the following sequence? 1, 11, 21, 1211, 111221, 312211, 13112221
A chicken was given $7, an
ant was given $21, a spider
was given $28. How much
money was the dog given?
My twin lives at the reverse of
my house number. The
difference between our house
numbers ends in two. What
are the lowest possible
numbers of our houses?
A sundial has the
fewest moving parts of
any timepiece. Which
has the most?
10
11
13
What is unusual about
the following words?
revive, banana,
grammar, voodoo,
assess, potato,
dresser, uneven
What makes the
following number
unique? 8,549,176,320
12
If 9999 = 4,
8888 = 8,
1816 = 6,
1212 = 0, then
1919 = ?
I left my campsite and
hiked south for 3 miles.
Then I turned east and
hiked for 3 miles. I then
turned north and hiked
for 3 miles, at which
time I came upon a
bear inside my tent
eating my food! What
color was the bear?
2018
Canalyst
Quiz
november earnings season
% change
# of co.
% of total
Up >
20%
75
2%
Up
10-20%
253
8%
Up
3-10%
626
20%
Flat
(± 3%)
1024
33%
Down
3-10%
672
22%
Down
10-20%
307
10%
Down >
20%
127
4%
august earnings season
% change
# of co.
% of total
Up >
20%
100
3%
Up
10-20%
256
8%
Up
3-10%
670
22%
Flat
(± 3%)
1064
35%
Down
3-10%
651
21%
Down
10-20%
264
9%
Down >
20%
77
2%
Source: Thomson. Returns are market relative from T
-3
to T
+3
of earnings.
Source:
xplaind.com/268982/portfolio-standard-
deviation
asset
a
b
Weight ($ or %)
50
50
Standard Deviation
10
10
Correlation of A-B
0.6
Portfolio SD %
8.94
asset
a
b
c
Weight ($ or %)
33
33
33
Standard Deviation
10
10
10
Correlation of A-B
0.7
Correlation of B-C
0.7
Correlation of C-A
0.7
Portfolio SD %
8.94
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