MACRO MEETS MICRO: ARE YOU HUNTING WHERE THE FISH ARE IN THE US EQUITY MARKET?

Takeaway: Hunt for longs and shorts by triangulating buy-side, sell-side and insider sentiment and positioning at the sector and industry levels.

SUMMARY BULLETS:

 

  • Using the S&P 500 Index as a proxy for the US equity market, we built a monitor that tracks performance, EPS and revenue revision trends, consensus ratings, short interest, option skew and insider buying/selling at both the sector and industry levels.
  • The purpose of the tool is to mechanically triangulate sell-side, buy-side and insider sentiment and positioning at the both the sector and industry levels, flagging extreme co-directional divergences as a contrarian opportunity on either the long or short side of a particular space.
  • At a bare minimum, our model can be used as a consistent, time-saving tool for generalist portfolio managers who are looking to quickly and efficiently identify which sectors and industries are good places to “hunt” for names that are more than likely either over or under owned.
  • Hopefully this all makes sense; email us if you have any questions, comments, suggestions or concerns regarding how we set up the model. We are happy to tweak it to your specific needs if this is a tool you can find additive to your existing idea generation process. We even have the capability of drilling down into a specific sector, industry or custom coverage universe, so don’t be shy about inquiring!

 

  • In the section below titled, “FINDINGS”, we list those sectors and industries that look interesting on either the long or short side, ranking them according to their degree of co-directional divergence with regards to the triangulation of said sentiment and positioning.
  • From the perspective of triangulating buy-side, sell-side and insider sentiment and positioning, the Metals & Mining and Diversified Telecom industries look particularly compelling on the long side. That being said, however, triangulating sentiment is just but one part of the equation; finding probable catalysts that will front-run a meaningful inflection in said sentiment and positioning is another matter altogether.
  • From our purview, we can name a 1,001 reasons why the Metals & Mining industry looks like a classic value trap here (namely the unwinding Mining CapEx Bubble), so we’d argue the market is getting this one right and should continue to get this one right. We don’t have a view on the Diversified Telecom industry, but we’ll leave that part up to you.
  • No sectors or industries currently stand out on the short side as particularly compelling from the perspective of triangulating buy-side, sell-side and insider sentiment and positioning.

 

In our latest attempt to help you uncover alpha in our favorite asset class (i.e. US equities), we us a more traditional top-down approach to scour the US equity market for longs and shorts at both the sector and industry levels. If you have yet to see our previous screen which quantified why investors should be increasing their allocations to domestically-domiciled corporations with a large US footprint, please refer to the following note: “ARE YOU LONG ENOUGH USD EXPOSURE AT THE MICRO LEVEL?” (7/25).

 

THE MODEL

Using the S&P 500 Index as a proxy for the US equity market, we built a monitor that tracks performance, EPS and revenue revision trends (four week deltas; sell-side consensus is lagging indicator), consensus ratings, short interest, option skew and insider buying/selling at both the sector and industry levels.

 

The purpose of the tool is to mechanically triangulate sell-side, buy-side and insider sentiment and positioning at the both the sector and industry levels, flagging extreme co-directional divergences as a contrarian opportunity on either the long or short side of a particular space.

 

At a bare minimum, our model can be used as a consistent, time-saving tool for generalist portfolio managers who are looking to quickly and efficiently identify which sectors and industries are good places to “hunt” for names that are more than likely either over or under owned.

 

MACRO MEETS MICRO: ARE YOU HUNTING WHERE THE FISH ARE IN THE US EQUITY MARKET? - 5

MACRO MEETS MICRO: ARE YOU HUNTING WHERE THE FISH ARE IN THE US EQUITY MARKET? - 7

 

ANALYTICAL CRITERIA

To determine if a particular sector or industry is a compelling place to “fish” in from the perspective of an investor or short-seller, we assigned the following criteria to each of the key metrics:

 

Sell-side scoring: (stocks penalized for extreme bullish sentiment; rewarded for extreme bearish sentiment)

 

  • NTM Consensus EPS Revisions: -1pt if the trailing 4WK revision is in excess of +1x standard deviations relative to the mean of the broader sample; +1pt if the trailing 4WK revision is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • NTM Consensus Revenue Revisions: -1pt if the trailing 4WK revision is in excess of +1x standard deviations relative to the mean of the broader sample; +1pt if the trailing 4WK revision is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • Bloomberg Consensus Ratings (1-5 scale): -1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; +1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean

 

Buy-side scoring: (stocks rewarded for extreme bearish positioning; penalized for extreme bullish positioning)

 

  • Short Interest as a % of Float: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • 3M 90%/110% Moneyness Skew Spread: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean
  • 3M 25-Delta Skew Spread: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean

 

Insiders: (stocks rewarded for aggressive insider buying activity; penalized for aggressive insider selling activity)

 

  • 6M % Change of Insider Ownership: +1pt if the figure is in excess of +1x standard deviations relative to the mean of the broader sample; -1pt if the figure is less than -1x standard deviations relative to the mean of the broader sample; 0pts if within [1x] standard deviations of the mean

 

Next, we assign a cumulative score of -1, 0 or +1 to each of the three buckets:

 

  • A score of -1 indicates the sum of a particular bucket is less than or equal to -1 (i.e. generally loved);
  • A score of 0 indicates the sum of a particular bucket is equal to zero (i.e. inconclusive); and
  • A score of +1 indicates the sum of a particular bucket is greater than or equal to +1 (i.e. generally hated).

 

Lastly, we amalgamate the cumulative scores into a final tally on an integer scale of -3 to +3:

 

  • +3pts: COMPELLING IDEA on the LONG side
  • +2pts: INTERESTING IDEA on the LONG side
  • +1pt: IDEA WORTH MONITORING on the LONG side
  • 0pts: INCONCLUSIVE on either the LONG or SHORT side
  • -1pt: IDEA WORTH MONITORING on the SHORT side
  • -2pts: INTERESTING IDEA on the SHORT side
  • -3pts: COMPELLING IDEA on the SHORT side

 

***Hopefully this all makes sense; email us if you have any questions, comments, suggestions or concerns regarding how we set up the model. We are happy to tweak it to your specific needs if this is a tool you can find additive to your existing idea generation process. We even have the capability of drilling down into a specific sector, industry or custom coverage universe, so don’t be shy about inquiring!

 

FINDINGS

In the section below, we list the various sectors and industries according to their respective scores (NOTE: sectors are underlined):

 

+3pts: COMPELLING IDEA on the LONG side:

  • Metals & Mining (7 stocks)
  • Diversified Telecommunication (5 stocks)

+2pts: INTERESTING IDEA on the LONG side:

  • Distributors (1 stock)
  • Household Products (4 stocks)
  • Telecommunication Services (6 stocks)

+1pt: IDEA WORTH MONITORING on the LONG side:

  • Internet & Catalog Retail (5 stocks)
  • Multiline Retail (8 stocks)
  • Personal Products (2 stocks)
  • Tobacco (4 stocks)
  • Energy (43 stocks)
  • Oil, Gas & Consumable Fuels (31 stocks)
  • Capital Markets (13 stocks)
  • Healthcare Technology (1 stock)
  • Life Sciences Tools & Services (5 stocks)
  • Aerospace & Defense (11 stocks)
  • Electrical Equipment (4 stocks)
  • Professional Services (4 stocks)
  • Road & Rail (5 stocks)
  • Computers & Peripherals (8 stocks)
  • Semiconductors (17 stocks)
  • Materials (30 stocks)
  • Independent Power Producers (2 stocks)

0pts: INCONCLUSIVE on either the LONG or SHORT side:

  • (omitted for the sake of brevity)

-1pt: IDEA WORTH MONITORING on the SHORT side:

  • Automobiles (3 stocks)
  • Beverages (9 stocks)
  • Consumer Finance (4 stocks)
  • Real Estate Management & Development (1 stock)
  • Biotechnology (6 stocks)
  • Commercial Services & Supplies (9 stocks)
  • Construction & Engineering (3 stocks)
  • Industrial Conglomerates (3 stocks)
  • Internet Software & Services (5 stocks)
  • Utilities (31 stocks)

-2pts: INTERESTING IDEA on the SHORT side:

  • Diversified Consumer Services (1 stock)
  • Wireless Telecommunication Services (1 stock)

-3pts: COMPELLING IDEA on the SHORT side:

  • N/A

 

CONCLUSIONS

From the perspective of triangulating buy-side, sell-side and insider sentiment and positioning, the Metals & Mining and Diversified Telecom industries look compelling on the long side. That being said, however, triangulating sentiment is just but one part of the equation; finding probable catalysts that will front-run a meaningful inflection in said sentiment and positioning is another matter altogether.

 

From our purview, we can name a 1,001 reasons why the Metals & Mining industry looks like a classic value trap here (namely the unwinding Mining CapEx Bubble), so we’d argue the market is getting this one right and should continue to get this one right. We don’t have a view on the Diversified Telecom industry, but we’ll leave that part up to you.

 

Darius Dale

Senior Analyst


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