Stocks

AgPa #41: US Factors before 1926

The Cross-Section of Stock Returns before CRSP (2023)
Guido Baltussen, Bart van Vliet, Pim van Vliet
SSRN Working Paper, URL

This week’s AGNOSTIC Paper is an unprecedented out-of-sample test of the four major factors (Momentum, Value, Low-Risk, Size). The authors construct a novel dataset of US stocks that reaches from 1866 to 1926. It therefore extends the extensively studied CRSP dataset by 60 years.

  • Momentum, Value, and Low-Risk were there before 1926
  • Factors weren’t stronger before 1926
  • Machine learning models find the same factors

Read the Full Post

AgPa #32: Agnostic Fundamental Analysis (3/3)

Boosting agnostic fundamental analysis: Using machine learning to identify mispricing in European stock markets (2022)
Matthias X.Hanauer, Marina Kononova, Marc Steffen Rapp
Finance Research Letters 48, URL/SSRN

The third and final post about agnostic fundamental analysis. This week’s AGNOSTIC Paper challenges the simple linear methodology and introduces vastly improved valuation models…

  • More sophisticated valuation models yielded better performance
  • Different models emphasize different fundamental variables

Read the Full Post

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

Read the Full Post

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

Read the Full Post

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

Read the Full Post

AgPa #29: Cost-Mitigation Techniques

Comparing Cost-Mitigation Techniques (2019)
Robert Novy-Marx, Mihail Velikov
Financial Analysts Journal 75(1), 85-102, URL/SSRN

This week’s AGNOSTIC Paper examines three techniques to mitigate trading costs of systematic equity strategies and compares them by after-cost performance. The empirical evidence clearly speaks for the application of more sophisticated trading rules (Technique #3)…

  • Trading costs decreased but are still important
  • Technique #1: focus on “cheap-to-trade” securities
  • Technique #2: rebalance less frequently
  • Technique #3: create better trading rules
  • Value- versus equal-weighted portfolios

Read the Full Post

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

Read the Full Post

AgPa #27: Forecasting DAX Index Changes

Forecasting index changes in the German DAX family (2020)
Friedrich‑Carl Franz
Journal of Asset Management 21, 135-153, URL

Is it possible to forecast and exploit changes in the composition of equity indices? This is the central question of this week’s AGNOSTIC Paper and the author introduces a quite interesting trading strategy for the German DAX family indices…

  • Index changes in the DAX family are predictable
  • Buying index additions and shorting deletions generated strong risk-adjusted returns

Read the Full Post

AgPa #26: Trading on Price Charts

(Re-)Imag(in)ing Price Trends (2022)
Jingwen Jiang, Bryan T. Kelly, Dacheng Xiu
The Journal of Finance, Forthcoming, URL

This week’s AGNOSTIC Paper is about technical analysis. Full disclosure: I never believed in technical analysis in the sense of drawing lines on charts or imagining somewhat arbitrary patterns.

But the approach of this week’s authors is quite different. They borrow methodology from image recognition and train a machine learning model to detect predictive patterns in price charts (Yes, the machine receives the price chart as picture, not the underlying numbers!)…

  • The model identifies very profitable short-term signals
  • The signals are also profitable over longer horizons
  • Some of the machine-learning-signals are explainable
  • The model disagrees with conventional technical analysis

Read the Full Post

AgPa #20: Performance of ESG Exclusions

The Expected Returns of ESG Excluded Stocks. The Case of Exclusions from Norway’s Oil Fund (2022)
Erika Berle, Wanwei (Angela) He, Bernt Arne Ødegaard
SSRN Working Paper, URL

This week’s AGNOSTIC Paper examines the ESG exclusions of a popular investor: the Norwegian sovereign wealth fund, also known as the “oil fund”. Between 2005 and 2021, the fund excluded 189 companies that engage in different types of “bad” practices or products. These exclusions are interesting because they reveal insights about the impact of ESG for a large real-world institutional investor…

  • ESG-excluded stocks generated up to 6.85% alpha per year
  • There seems to be a return premium on “bad” stocks

Read the Full Post