Consumer-grade Apps Don’t Work For Equity Analysts

Our CEO, Alap Shah, wrote a guest article that appeared in HedgeWeek this morning on the topic of consumer-grade note-taking apps, and why they don’t work for equity analysts*.

Investment analysts, by and large, are a pretty smart group. If they can find a better way to do their job, they will. So it’s no surprise that an industry that relies so heavily on information has adopted a number of consumer-grade apps to enhance their workflow. And while better than nothing, this practice can create more problems than it tries to solve.

In the analyst community, note-taking apps such as Evernote and OneNote now often serve as the foundation for the research process, in spite of the fact that neither were designed with analysts in mind. Why are these solutions being adopted? First, they are mostly an improvement over the ubiquitous network and folder structure. Second, they are fairly cheap and easy to use. But perhaps most importantly, they bypass internal IT operations that would otherwise express security concerns with such apps. While these solutions do offer an improvement over a network and folder topography, many times they are more like putting square pegs in to a round hole – they might fit, but you’re going to have to smash them in there pretty hard.

On the surface, consumer note-taking applications appear to be a good fit to manage the enormous amount of information—broker research, news, internal notes, SEC filings, call transcripts, etc.—that forms the basis of the fundamental research process. However, there are a number of instances where these generic apps fall short, and, ultimately, inject more problems into the research process than they solve.

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Auto Insurance Voices Caution As Self-Driving Cars Near

We analyzed over 9 million financial documents, covering more than 10,000 companies across the globe, for mentions of the self-driving car theme. We found that interest in self-driving cars has grown 8.5x in the past two years, but suspect that there is much more interest to come. Predictably, car and technology vendors were earliest in bracing for the technology’s impact, but the insurance industry is now beginning to take the threat seriously.

tesla self driving

Self-driving cars are approaching quickly. Google unveiled its self-driving project just four years ago, while Tesla shipped the first car with its famous auto-pilot feature just one year ago. Though impressive progress has been made, much more is needed before self-driving cars reach scale. In the meantime, there have been setbacks. Last May, the first person was killed in a car operating on auto-pilot, while Uber ended its San Francisco self-driving project after a week amid permit conflicts with the DMV, along with several sightings of its cars running red lights. (The project continues in Arizona.) Despite the inevitable bumps along the way, self-driving cars—also known as “autonomous vehicles”—will almost certainly become a reality within the next two decades, and their impact will be felt massively across the transportation and logistics industries, among others. Read More

Guest Post: 5 Oil Patch Themes You Should Be Following In 2017

Guest Post courtesy of happy Sentieo client and energy expert Philip Dunham .

2016 was a volatile year for oil and gas. WTI traded to lows in the mid $20s, then rebounded to finish the year around $54. The road to recovery for the energy industry in 2017 can be characterized as cautiously optimistic as WTI prices have stabilized over the past couple of weeks and energy companies have started to slowly hire and ramp activity.

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There were a number of themes that emerged as the year progressed including:

  • Rebounding rig counts and the return of service cost inflation
  • The Dallas Fed and Permian-focused E&Ps expressing concerns over rich Permian Basin acreage valuations
  • Another year of low oil prices and OPEC production cuts
  • The RINsanity of ethanol blending and a possible border adjustment tax
  • Natural gas coming out from the shadow of oil with demand catching up to supply

We will review the themes of 2016 and those themes going forward into 2017. Read More

Wall Street Consensus Trades Fell Apart in 2016: 16.2% Underperformance

Following Consensus Trades worked in 2013 and 2014, and started to lose some money in 2015. After running the numbers, we were shocked to see this developing consensus underperformance trend accelerate by 1270bps for 2016.

We analyzed Thomson Reuters’ I/B/E/S dataset and looked at instances where analysts were unanimously bullish or bearish on a stock.  It turns out that analysts recommendations correlated strongly with share price performance.  However, there was one tiny caveat: the buys dramatically underperformed the sells in 2016.  The unanimous buys were up 4.5% while the unanimous sells were up 20.7% so a market neutral consensus portfolio lost ~16.2% last year.  It turns out that 2016 was a year where betting against the analyst herd paid off!

share-price-distribution-chart-02
The chart above shows the distribution in share price performance between both cohorts. (The bullish group had outliers up +1618% and +1189% that are not shown.) While the winners in both groups performed roughly the same, the losers in the bullish group fell more than the bearish group.

One major factor behind the underperformance was the bullishness surrounding small-cap development-stage pharma stocks.  For healthcare stocks (which were mostly small-cap pharma names in our cohorts), the number of consensus buys outnumbered the sells by a factor of 13.7X versus a baseline rate of 2.24X.

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Are You Tracking 2016’s Most Influential FinTweeters?

As part of our curated Twitter feature in our Equity Data Terminal, we have mountains of data on the most influential finance Twitter accounts.  To our surprise, the most influential accounts aren’t professional content creators or major news organizations.  Nor are they famous money managers with billions in assets under management.

While many equity analysts currently do not use finance Twitter, the early adopters of finance Twitter likely stand on the vanguard of where news is headed.  Firstly, traditional news outlets like newspapers and TV shows must create filler content on a slow news day.  Social media is a more flexible channel for receiving news, expanding where there is news (e.g. Trump winning the election) and contracting when there isn’t.  Secondly, curation by peers lets the cream rise to the top.  Formerly obscure research such as AZ Value’s blog was distributed on finance Twitter well before Valeant issued an 8-k rebutting AZ Value (and before the dramatic fall in Valeant’s share price).  That type of niche content is unlikely to appear in more mainstream channels.

As we get ready for 2017 and spending at least the next four years with a Tweeter-in-Chief in the White House moving markets, we often find our client conversations turning towards the effective use of social media in professional investment management. Consider this your cheat sheet.

High Level Takeaways

  • FinTwit’s most influential accounts are dominated by equity analysts who put out insightful content in their spare time.
  • Second to equity analysts, there are the activist shorts that use Twitter to promote their campaigns.  Like it or not, their ability to move markets makes them relevant and difficult to ignore.
  • Following the activists shorts, there are niche news accounts (e.g. Activist Shorts, Marketfolly) that mainly aggregate content and curate news specifically for equity analysis.  These accounts are far more influential than the official accounts of major news outlets, suggesting that most of finance Twitter prefers the curation of peers and aggregators.

The big picture is that peer-curated news is poised to become a bigger headwind for traditional news.  Whereas many newspapers previously enjoyed local monopolies, they now face massive competition in a social media world.  This is a world where anybody can create, distribute, and promote their content.  There are no barriers to entry anymore.  News titans like CNBC and Bloomberg (with their teams of professional journalists) have fewer finTwit follows than a hedge fund manager from Australia who blogs on the side (@John_Hempton).  If social media’s popularity grows, the trend will likely continue to erode the returns on capital that traditional media companies have enjoyed.

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$SNAP IPO – The Minimum Viable History of Snapchat

Like many of our clients, Sentieo is gearing up to cover what is likely to be the biggest technology IPO of 2017. We will be doing a series of 5 minute reads, reintroducing potential investors to key parts of the investment story.  If you would like to receive notification when these go out, you know what to do.

Evan explaining the Why of Snapchat with none of the high-production-fluff.

High Level Takeaways

  • On average, Snap rolls out a major new product once every three months.
  • In the past two years, this product strategy was significantly supported by rolling up adjacent products. This implies acquisitions likely to appear as products soon are Mobile Search and Augmented Reality.
  • The last two years’ $350m acquisition bill is only 70% of its Series D, indicating the company likely had both tremendous ROI on its acquisitions as well as a sizable war chest for more rollups.

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