The Friday Findings – December 29th, 2017
The Final Friday Findings (of ’17) – December 29th, 2017
Chart Of the Week – Systematic Valuation Frameworks Can Be Effective
- MiFID II – The Demise Of An Industry – Our Reaction
- Chart Of The Week – Systematic Valuation Frameworks Can Be Effective
- Weekly Winners & Losers
The arrival of MiFID II has caused us to rethink our research distribution, particularly given our wide distribution in Europe.
Each Friday we will produce an email compliant with “Recital 29” of MiFID II – i.e. containing only macro data, and post results information. This will be distributed widely. It will contain the “Chart of the Week” as well as links to:
- The Full Friday Findings Email – focusing on our short-term thinking, but highlighting news and other data that relates to our central stock and sector ideas.
- Our most recent Monthly Industrials report – linked here after 5pm today – revised to a power point format.
- Our most recent Monthly Chemicals report – the first will be available mid-January
- A new Monthly SMID Chemicals report – 1st publication date TBD
These reports will include our stock preferences and whatever themes we have been working on. Clients will require a log-in to retrieve the reports from our website – thus making the email MiFID II compliant.
We will maintain select PDF distribution lists for all compliant clients and the reports will be sent out as normal, when published – as today.
In addition, we will work on some very detailed specific themes through the year, the first will be the subject of a separate email shortly. We will tackle industry controversies that have stock implications – some more significant and broader than others. These reports will be free of charge to any client paying SSR Industrials above a certain threshold, but will be available for a fee to others. “Read-only/research only” MiFID II based research agreements will not cover these “bespoke” studies.
We look forward to maintaining a strong face to face connection, via in-office meetings and via calls and Skype with those clients that value the input we can provide above and beyond the written work.
Happy New Year and good luck in 2018.
The chart of the week shows the annual performance of our two primary valuation metrics since 2013 – one screens for stocks most out of phase with what we define as normal value and the second looks for stocks where valuation is most out of alignment with current earnings. The second, which we refer to as our Skepticism Index, looks for companies where returns on capital are not appropriately discounted in valuation (investors are “Skeptical” if returns suggest much higher valuation). The analysis covers around 120 stocks across Industrials and Materials and each month we buy the cheapest and most skeptical and short the most expensive and least skeptical. The results in the chart also include owning and shorting just the overlap group and those results tend to be better.
We lost ground in 2015 relative to the S&P but 2015 was a growth investor market with weak economic growth – so very unfriendly generally for the old industries we cover. Otherwise the metrics have proven to work consistently – note that we have outperformed a very strong momentum market in 2017 with each methodology. We used the “normal value” metric just for chemicals at a prior firm and the results over 12 years produced outperformance over 10 of those 12 years. This analysis has been published consistently in our Industrials and Materials end of month report since 2013.
In the chart below we show the stocks that sit in each group today.
When we look at a sector level we get very strong results buying the second cheapest sector and shorting the second most expensive. We think that the reason is because often the extreme positions are occupied by commodity driven names that can swing wildly and have cycles that last more than a year. Buying Metals in 2013, for example, was a mistake, as it was in 2014.