Fundamental Analysis

AgPa #51: Short Sellers vs. Firms

Go Down Fighting: Short Sellers vs. Firms (2012)
Owen A. Lamont
The Review of Asset Pricing Studies 2(1), URL

I like controversial and (in my opinion) misunderstood topics and this week’s AGNOSTIC Paper examines the next big one: short selling. The paper is unfortunately already more than 10 years old, but it is still a go-to reference for short selling. Apart from that, the fights between firms and short sellers are also quite entertaining – at least from an outsider’s perspective…

  • Short-seller-fighting firms tend to massively underperform
  • The results are robust after controlling for the major factors

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AgPa #31: Agnostic Fundamental Analysis (2/3)

Global market inefficiencies (2021)
Söhnke M. Bartram, Mark Grinblatt
Journal of Financial Economics 139(1), 234-259, URL/SSRN

The second AGNOSTIC Paper on agnostic fundamental analysis. This one is the international out-of-sample test where the authors apply their methodology to stock markets around the world. The results point in the same direction and suggest robust out-of-sample evidence…

  • Undervalued stocks outperformed overvalued stocks – also globally
  • Agnostic fundamental analysis yielded significant alpha – globally and against up to 80 factors
  • Agnostic fundamental analysis remains profitable after transaction costs
  • The degree of market efficiency differs around the world

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AgPa #30: Agnostic Fundamental Analysis (1/3)

Agnostic fundamental analysis works (2018)
Söhnke M. Bartram, Mark Grinblatt
Journal of Financial Economics 128(1), 125-147, URL/SSRN

This week’s AGNOSTIC Paper tackles a very basic question: Does fundamental analysis work? For that purpose, the authors introduce an agnostic valuation model that explains the market capitalization of companies by their most recent fundamentals. A strategy that bets on the convergence of prices and estimated “fair” values generated strong profits between 1987 and 2012…

  • Undervalued stocks outperformed overvalued stocks by about 0.5% per month
  • Agnostic fundamental analysis yielded significant alpha

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SA #1: MSCI – Even Quality Can Become Too Expensive

MSCI: Even Quality Can Become Too Expensive
November 9, 2022

Summary

  • On October 25, MSCI reported quite strong 9M numbers and, for the moment, defended its high multiples (LTM P/E about 44).
  • In this article, I focus on a high-level valuation of MSCI to decide if it’s worth analyzing the stock in more detail.
  • Using a standard DCF-WACC model, market data for interest rates, and reasonable estimates for future fundamentals suggests massive overvaluation (theoretical downside of 54%).
  • The result is very similar when comparing MSCI to common valuation multiples of a peer group. Depending on the multiple, the company trades at a premium of up to 60%.
  • MSCI is undeniably a very high-quality company. But at the current levels, the company just appears way too expensive. So I am not yet interested.


Read the Full Article on Seeking Alpha

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AgPa #28: “Not Selling” of Insiders

Is “Not Trading” Informative? Evidence from Corporate Insiders’ Portfolios (2022)
Luke DeVault, Scott Cederburg, Kainan Wang
Financial Analysts Journal 78(1), 79-100, URL/SSRN

Transactions of insiders are usually a useful source of information when evaluating a stock. Insiders typically have a good understanding of the underlying business and buys are therefore often considered as positive signal. On the other hand, insider sales are not necessarily negative. There are many non-informative reasons to cash out. Maybe the insider needs some cash for personal expenditures or just wants to diversify his assets. This week’s AGNOSTIC Paper challenges this asymmetry and creatively shows that even those transactions convey important information…

  • “Not sold” stocks from insider portfolios outperformed
  • A portfolio of “not sold” stocks easily beat the US market
  • “Not sold” stocks with momentum are even better
  • Corporate insiders know more than institutional investors

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AgPa #16: Concentrated Stock Markets (7/7)

Mutual Fund Performance at Long Horizons (2022)
Hendrik Bessembinder, Michael J. Cooper, Feng Zhang
SMU Cox School of Business Research Paper No. 22-11 via SSRN, URL

The seventh and final AGNOSTIC Paper on the extreme concentration in stock markets. This one is an out-of-sample test and documents very similar concentration and positive skewness for US mutual funds between 1991 and 2020.

  • Longer investment-horizons lead to extremer return distributions – also for mutual funds
  • Most active managers underperform passive benchmarks – especially over the long-term
  • Compared to the S&P 500, mutual fund investors lost about $1.3T between 1991 and 2020

But a picture is worth a thousand words…


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AgPa #15: Concentrated Stock Markets (6/7)

Extreme Stock Market Performers, Part I: Expect Some Drawdowns (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The sixth of seven AGNOSTIC Papers on the extreme concentration in stock markets. This one shows that even for the top wealth-creators, the road to success has been anything but smooth…

  • Even the best companies during their best decades had substantial drawdowns
  • Today’s drawdowns of tomorrow’s winners are even worse

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AgPa #14: Concentrated Stock Markets (5/7)

Extreme Stock Market Performers, Part IV: Can Observable Characteristics Forecast Outcomes (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The fifth of seven AGNOSTIC Papers on the extreme concentration in stock markets. This one will finally examine how to identify the few big winners ex-ante (at least it will try). Future winners have some distinct fundamental characteristics today. That said, the picture remains noisy and it’s very difficult to find them systematically…

  • Future top-performers tend to be younger, produce higher drawdowns, and spend more on R&D
  • Future wealth-creators tend to be older, more levered, and pay higher dividends
  • Identifying big winners remains challenging

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AgPa #13: Concentrated Stock Markets (4/7)

Extreme Stock Market Performers, Part III: What are their Observable Characteristics? (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The fourth of seven AGNOSTIC Papers about the extreme concentration in stock markets. This one goes one step further and examines the fundamental characteristics of big winners ex-post. The main insight is quite intuitive: outstanding stock performance usually comes with outstanding fundamental performance of the underlying company…

  • Big winners grow faster, are more profitable, and have smaller drawdowns
  • Observable fundamentals still explain relatively little

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AgPa #12: Concentrated Stock Markets (3/7)

Extreme Stock Market Performers, Part II: Do Technology Stocks Dominate? (2020)
Hendrik Bessembinder
SSRN Working Paper, URL

The third of seven AGNOSTIC Papers about the extreme concentration within stock markets. This one examines the industry composition of the most and least successful companies between 1950 and 2019 in the US. Unfortunately, just looking at industries is not really helpful to identify the few big winners…

  • The Tech-Industry is not as dominant as it seems at first glance
  • There is (unfortunately) not “the one” industry to look at

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