One of the key roles of equity portfolio managers and traders with actively managed investments is the ability to moderate event risk. When we say event risk, we mean protecting portfolio returns through inventory management on price moving events that are known, and those which are not. Whilst the latter is typically managed reactively(given the unexpected nature of the event) the former can be mitigated by utilising the right analysis tools, data sets and instruments. Event risk can take on many forms, one key area of focus is for investment managers is determining volatility and price direction around Earnings Season.
OTAS’ core expertise of providing market intelligence on investment portfolios allows managers to foresee outlying risks or opportunities across a range of multi-asset factors. Our Earnings Positioning View presents analysis on factors such as market sentiment, momentum, positioning and fundamental analysis for stocks heading into reporting season. Used as an ‘early warning system‘ it allows clients to understand where potential drivers of share performance exist, helping them predict price reaction over the event so they may reposition or hedge accordingly.
Using Earning Positioning View
The following example uses the Top 500 companies in the US due to report earnings shortly and filters out those stocks subject to the most exceptional downward revisions to earnings estimates(with respect to their sector) and compares price performance over the same period. It highlights a number of idiosyncrasies across fundamental and technical factors suggesting dislocation between market and sell-side expectations.
- Six* stocks reporting financials in the upcoming weeks have experienced earnings forecast downgrades well in excess of their peer group.
- Of these, four stocks:- American Airlines, SL Green Realty, United Continental and BB&T have all produced positive price return over the same period, statistically divergent from the change in EPS forecasts.
- American Airlines recent out performance has left the stock technically overbought on its RSI measure(reading >70)
*Intuitive Surgical EPS estimates affected by recent stock split.
Changes in market sentiment can also be captured. OTAS’s short interest analysis provides insight into Hedge Fund positioning and can be a lead indicator ahead of numbers. Clients can quickly screen portfolio holdings for stocks whose free float shares on loan have seen a significant increase or decrease prior to reporting.
Using the US Top 500 companies as an example again and filtered by decreasing short interest, the following is observed:
- Four stocks have experienced an exceptionally large decrease in short interest in the last week.
- Carmax and CF Industries have also seen large upgrades in analysts forecast in the prevailing month, possibly explaining the recent change in Hedge Fund sentiment.
- The ‘Days to Cover’ column displays how many days total trading volume it would take to cover the outstanding short base. All four companies still have high implied risk of a ‘short squeeze‘ and should be a key consideration over Earnings.
This blog has touched on just a handful of filtered views and analyses presented via the Earnings Positioning View however clients can individually customise their own views to include the exception analysis on factors and metrics most relevant to their portfolio or investment style.
As we quickly approach Q3 quarter reporting season and with many global indexes touching new all time highs, the focus on earnings and outlook will be scrutinized more closely than ever. OTAS can help you quickly navigate through the noise and minimise event risk by identifying the stocks which may be carrying unanticipated risks or conversely present a potential investment opportunity which the broader market may be overlooking.
For more details on the Earning Positioning View contact OTASSales@liquidnet.com
