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Value Drivers: Growth - Stop Wasting Time, Start Adding Value, Part II
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Value Drivers: Growth - Stop Wasting Time, Start Adding Value, Part II

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In six parts Andrew Stotz will teach you how to Stop Wasting Time and Start Adding Value on the two topics: Stock picking and Managing a portfolio. ...

In six parts Andrew Stotz will teach you how to Stop Wasting Time and Start Adding Value on the two topics: Stock picking and Managing a portfolio.

The second and third part will focus on value drivers, namely growth and risk. In this second part I'll talk about growth as a value driver and answer the question: Can you make money by surprise?

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Value Drivers: Growth - Stop Wasting Time, Start Adding Value, Part II Value Drivers: Growth - Stop Wasting Time, Start Adding Value, Part II Presentation Transcript

  • STOP Wasting Time START Adding Value2014-05-20 Can you make money by surprise? Part II: Value Drivers - Growth
  • Pick stocks Managing a portfolio Forecasting Value drivers Five factors of return Risk matters more Stop targets Reduce action Every day is new 6 May 2014 2 In six parts Andrew Stotz will teach how to Stop Wasting Time and Start Adding Value in stock picking and portfolio management. In Part II & III the focus will be on value drivers. Here in Part III we’ll focus on growth. Source: A. Stotz Investment Research
  • PICKING STOCKS Value drivers: Growth and risk are the drivers of value. In this Part II we will focus on growth and in Part III we will talk about risk as a driver of value 6 May 2014 3Source: A. Stotz Investment Research
  • VALUE DRIVERS 6 May 2014 4 𝑉𝑜 = 𝐷0(1 + 𝑔) 𝑛 (1 + 𝑟) 𝑛 𝑉𝑜 = 𝐷0(1 + 𝑔) 𝑟 − 𝑔 Source: A. Stotz Investment Research
  • VALUE DRIVERS Look for unanticipated increases in growth or Unanticipated decreases in risk 6 May 2014 5Source: A. Stotz Investment Research
  • CAN YOU MAKE MONEY BY LOOKING FOR THE SURPRISE? 6 May 2014 6Source: A. Stotz Investment Research
  • IS UNANTICIPATED GROWTH A DRIVER OF VALUE? Source: A. Stotz Investment Research
  • Started with 16,500 stocks in Asia ex- Japan from year-end 2003 to 2013 Removed 9,000 stocks that were small, had low trading volume or were inactive during any of the years Then removed the 2,200 China A-shares stocks, leaving 5,300 available stocks Our tested universe had 1,000 stocks which, for any year, had data for both actual and forecasted EPS and three or more analyst forecasts 6 May 2014 8 IS UNANTICIPATED GROWTH A DRIVER OF VALUE? Source: A. Stotz Investment Research
  • Methodology  Compare consensus one-year forward EPS estimate for each stock against the EPS growth that actually occurred, percentage difference being the surprise growth  Rank surprise growth in deciles from high (most positive) to low. Construct portfolios based on this rank, hold stocks for one year, rebalance each portfolio every March according to new ranking of growth surprise  Calculate the simple average return of each decile for each year from March 2003 - March 2013  Calculate the risk-adjusted return, Sharpe ratio for each decile above IS UNANTICIPATED GROWTH A DRIVER OF VALUE? 6 May 2014 9Source: A. Stotz Investment Research
  • OF COURSE, POSITIVE EARNINGS SURPRISES GIVE MUCH MORE RETURN 6 May 2014 10 56 40 29 23 16 11 6 (2) (8) (15)(20.0) (10.0) - 10.0 20.0 30.0 40.0 50.0 60.0 Investable Asiaex-Japan (2003-2013) Average (Return,%p.a.) <== Most positive surprise to most negative surprise EPSgrowth ==> Sources: A. Stotz Investment Research, FactSet
  • POSITIVE SURPRISES ALSO GIVE BETTER RISK-ADJUSTED RETURN 6 May 2014 11 0.9 0.8 0.7 0.6 0.4 0.3 0.2 (0.0) (0.2) (0.4) (0.2) - 0.2 0.4 0.6 0.8 1.0 Investable Asiaex-Japan (2003-2013) Average (Sharperatio) <== Most positive surprise to most negative surprise EPSgrowth ==> Sources: A. Stotz Investment Research, FactSet
  •  Positive surprises produce very high return  Negative surprises are painful  High-forecasted growth is likely to disappoint  Add value by finding positive earnings surprises 6 May 2014 12 WHAT WE HAVE LEARNED Source: A. Stotz Investment Research
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