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?

1. STOP
Wasting Time
START
Adding Value2014-05-20
Can you make money by
surprise?
Part II: Value Drivers - Growth

2. 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

3. 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

4. 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

5. VALUE DRIVERS
Look for unanticipated
increases in growth
or
Unanticipated
decreases in risk
6 May 2014 5Source: A. Stotz Investment Research

6. CAN YOU
MAKE MONEY
BY LOOKING FOR
THE SURPRISE? 6 May 2014 6Source: A. Stotz Investment Research

7. IS UNANTICIPATED GROWTH
A DRIVER OF VALUE?
Source: A. Stotz Investment Research

8. 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

9. 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

10. 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

11. 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

12.  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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