How to Use Web Search Trends In Your Fundamental Research Workflow: Beat or Miss?

Note: The content of this post references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Alternative data is a hot topic these days. From buzz around satellite imagery data to social chatter, there is a deluge of data out there. How can you make use of it, though?

Let’s walk through an example with Sodastream ($SODA). We used Sentieo to plot global web search trends for the “sodastream” keyword (dark blue) against the $SODA stock price (light blue).

View Interactive Chart

The correlation is great, but we don’t suggest that you buy a stock just because alternative data is going up. You should instead use this data as another pillar of a comprehensive investment process. Ask yourself: how does alternative data tie back to the fundamentals of a business?

As consumers, we tend to search for products online before purchasing. In most cases, searching Sodastream signifies interest in the brand or an intent to purchase – let’s call this “digital traffic.” Some percentage of that “traffic” will convert to true revenue as the consumer makes an purchase online or in-store at a later point.

So while search trends will most closely tie to digital traffic, we hope it can be a meaningful indicator for overall Revenue (or other top-line key performance indicators). As we can see from the chart below, that seemed to be the case here. Search trends had a 0.9 r-squared with $SODA’s revenue growth.

View Interactive Chart

This example is just one way that search trends can help you in your fundamental research. Stay tuned for the upcoming posts in this blog series on alternative data search trends.

Earnings Guide Part 2 : Using Sentieo’s Alternative Data to Predict This Week’s Earnings Announcements

Note: The content of this post references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

With earnings season continuing this week, the Sentieo team has been making their predictions about earnings using alternative data from Sentieo Mosaic. Last earnings season, the team accurately predicted the Netflix, Snapchat, Twitter, Skechers, Grubhub, Trupanion, and Hubspot beats.

Our Methodology: Why Does This Data Predict Earnings?

In the graphs below, we are presenting Quarterly YoY growth in Google Trends, Website Visits (Alexa Panel), and Twitter Mentions. In all cases, we have compared the data against quarterly revenue growth. Alternative datasets like these are offered in the Sentieo platform and can provide an edge in analyzing consumer-facing businesses, as they often have a high correlation with revenue growth and are available ahead of traditional financial metrics for the period. As consumer behavior shifts more and more towards digital, indicators like these have become more predictive of tech and consumer company results. Below each chart is a link to the interactive version of the graph.

Here’s what we’re thinking for Floor & Decor:

 

FND – Floor & Decor Holdings (Call on Thursday, May 3, 2018)

 

Floor & Decor Holdings is a leading specialty retailer in the hard surface flooring market, selling tile, wood, and other accessories at low prices. The company was founded in 2000 and is headquartered in Atlanta.

We used Sentieo Mosaic to analyze alternative data for the brand, plotting it in the chart below. The chart shows that Google Trends (green line) and Alexa Website Visits (red line) have historically correlated with FND’s revenue growth; both datasets caught major revenue growth inflections in early and late 2017. For Q1 2018, Google Trends decelerated, but has leveled off more recently, while Alexa data has moved sideways in the face of an expected revenue deceleration from analyst estimates.

View Interactive Chart: http://snt.io/VW5jpdqoc

 

The Google Trends data below shows that business is growing nicely for FND. The top blue line represents Google Trends data for 2018, and demonstrates that FND is hitting new heights this year.

 

FND is a high multiple stock and has moved up a lot since last earnings, suggesting that the bar is high. FND looks like a likely beat this quarter, but if the company misses estimates, expect the stock to go down.

sentiment

Introducing Sentieo’s Game-Changing Transcript Sentiment and Linguistic Analysis Features

Over the last year, the Sentieo team has been investing heavily in NLP & data science. We were very excited to release the Sentieo’s Transcript Intelligence Report, which is the first of many features built on a powerful new technology that lets us dissect documents and help you find insight.

There is signifcant amount of academic research that supports the idea that changes in sentiment among those in company management, as well as those working as analysts, do indeed have some relationship with stock returns.

Management is typically a negative predictor of stock returns. When management seems overly excited about the future, this may indicate that the stock will underperform. (See “Manager Sentiment and Stock Returns,” Journal of Financial Economics). On the other hand, when investor sentiment is low, subsequent returns are relatively high on a subset of stocks (high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks), consistent with an initial underpricing of these stocks. (See “Investor Sentiment in the Stock Market,” Journal of Economic Perspectives).

Our Transcript Intelligence Report provides automatic analysis on how sentiment and keywords for a given company have changed across quarters. The analysis easily splits out Management Sentiment vs. Analyst Sentiment. Let’s use Netflix as our example.

First, we open up Sentieo Document Search and search for Netflix transcripts. We choose a transcript in the left hand navigation, and see a “View Linguistic Intelligence Report” button at the top of the document in the right hand pane.

sentiment

 

 

We’re taken to the full Transcript Analysis page, and can now dive into the analysis!

sentiment

 

Sentiment Scores

Sentiment scores are generated by tagging each word in the document as positive, negative, or neutral using a dictionary designed for financial documents and applying a formula to generate a score for each section. The formula for sentiment is below:

The number (typically a decimal value below 0.1) is a percentage that should be considered on a relative basis, rather than absolute.

Management Sentiment

The following chart shows sentiment for Management commentary and Q&A answers on eight quarters of earnings calls. Sentiment is calculated as positive word % of total words – negative word % of total words.

management

 

 

 

Analyst Sentiment

The following chart shows sentiment for Analysts from the Q&A section of eight quarters of earnings calls. Sentiment is calculated as positive word % of total words – negative word % of total words.

 

 

 

Management-Analyst Sentiment Spread

The following chart shows the historical spread between Management and Analyst sentiment.

The spread between the two would suggest divergences in sentiment. For example, if the spread turned negative, then it is possible that management has turned less bullish while analysts have remained bullish, thereby signaling the potential for management to disappoint in future periods.

 

 

 

Conference Calls Sequential Comparison Word Cloud

The comparison word cloud shows the biggest changes in average keyword frequency between the 2018-04-16 conference call and the 2018-01-22 conference call for NFLX.*

 

 

 

 

Analyst vs Management: Keyword Differences

This is another comparison cloud showing the major average differences between management and analyst keywords on the 2018-04-16 conference call.

 

Management Top 15 Keywords

This table shows the top 15 keywords by frequency referenced in the past eight quarters of earnings calls. This provides a visual view at a glance into what is being discussed on the earnings calls over time.

 

 

 

Analysts Top 15 Keywords

 

 

 

Sign up for a free trial of Sentieo to get the sentiment report for Netflix and any other ticker you follow.

Analyzing Promotional Activity in the Sportswear Industry with Alternative Data ($NKE, $UA, $ADS:GR)

The global sports industry is huge, estimated to be around $1.3 trillion. Within sports, the sportswear market is a great place for investors looking at strong brands in a large and growing market.

Recently, the sportswear industry has seen a rise in promotions and discounting activity, as have other segments of the retail industry. A combination of factors such as a decline in tourist spending, slowing foot traffic and a negative consumer spending environment has affected the majority of companies in the space, limiting their growth potential and pricing power. These headwinds, together with the companies’ aggressive expansion plans and excess inventories (as is the case for Under Armour and, in part, Nike), has triggered a rise in promotional activity by many players.

In order to understand the current status of inventories in the industry and to verify the balance between supply and demand, it’s necessary to understand how promotional activity is evolving.

Sentieo’s Mosaic product allows investors to get a clearer idea of how promotional activity is evolving in the sportswear and athletic footwear markets by looking at alternative data, giving analysts a view into the current sources of pressure on gross margin.

Using Twitter Mentions, we can build queries to track the number of mentions of any word or combination of words. Twitter is one of the most important social media networks for businesses, and every brand and third-party retailer in the sportswear and athletic footwear industry promotes on the platform. Let’s go directly into the chart below to see how Nike’s promotional activity has evolved over the past three years.

Sentieo nike promotional activity

The chart shows the 30-day moving average for the number of Twitter mentions for promotional activity, including phrases such as “Nike discount,” “Nike 30% off,” “Nike clearance,” and so on. We can see that promotional activity was particularly intense between 2015 and 2016, but declined substantially in more recent times. It has been very slow since the beginning of 2018, reaching a four-year low.

Now that we have an idea of how Nike’s promotional activity has trended, let’s look at Adidas. Adidas is Nike’s main competitor, and its successful expansion strategy for the past few years has diminished Nike’s market share and created more opportunity for other smaller competitors. It has limited the American giant’s growth both internationally and in the domestic market. As we can see in the chart below, Adidas’ discounting mentions were lower during the high-growth phase between 2015 and 2016, while Nike was facing strong competitive pressures and engaged in more aggressive promotion. The situation has changed in the recent past, with Adidas’ promotional activity increasing significantly in 2017 and remaining a bit higher than it was in 2015/2016.

Sentieo Adidas

The data clearly shows that the situation has reversed in comparison to last year, and the Adidas brand, for one reason or another, has shown an increase in promotional activity, while Nike has moved in the opposite direction.

Let’s look at another interesting name in the industry: Under Armour. Under Armor has enjoyed years of aggressive expansion with revenue growth rates around 27%-32%, some of which can be attributed to the increasing popularity of its endorser, basketball star Stephen Curry. However, the growth rate plummeted from 21.8% in 2016 to just a bit above 3% in 2017.

Sentieo Under Armour

 

Under Armour’s aggressive expansion plans backfired and a strong imbalance between supply and demand generated a steep increase in inventory levels, which reached 23.3% of revenue at the end of 2017, compared with 19.7% in 2015 and 17.4% in 2014. It shouldn’t be a surprise that promotional activity skyrocketed in the second half of 2017, which was a necessary response to the alarming rate of inventory build-up. The chart below shows that mentions of promotional activity reached a historical high in December 2017.

Sentieo Under Armour promotions

Sentieo’s alternative datasets have allowed us a unique view into key industry dynamics like promotional activity, one of the primary drivers of margin pressure in the sportswear industry.

Investors and analysts should take these insights into account when they assess the attractiveness of the aforementioned stocks; datasets like Twitter mentions can definitely shed light on the probable direction of margins.

While we were looking at promotions, we looked at alternative data to forecast Nike’s next quarter using Google Search Trends data. Google Trends tends to lag Nike’s revenue growth by about a quarter and recent trends seem to indicate that they make not make the growth target for next quarter. It’s still early, however, and the most recent month of data has not fully come in yet.

Nike Sentieo

Is Skechers (SKX) Management Guidance Too Conservative?

Skechers USA (SKX) is a lifestyle and performance footwear brand that was founded in 1992. We looked at Skechers’ recent performance using Sentieo Mosaic to assess how they will perform on their next earnings call on Thursday of this week.

SKX started off with a strong rally in October that included an earnings beat and raised guidance. However, Skechers still hasn’t gotten the deserved love from the market yet.

SKX trades lower than its peers, both in the shoe segment and in the athleisure industry, trading at just 9.5x full-year EV/EBITDA, quite a low multiple compared to its closest peers. The chart below plots 2018 CY EV/EBITDA vs. 2018 CY Revenue Growth, showing that Skechers is not getting the multiple it deserves based on revenue growth.

Skechers Revenue Growth vs Multiples

The Street seems to doubt Skechers’ profitability since margins have been a bit volatile in the past. It seems that the market has only started to recognize Skechers’ growth recently, after seeing the better-than-expected operating margins last quarter. Skechers operates in a segment of the footwear market that doesn’t give the company the pricing power and margin stability of a market leader like Nike.

In any case, as the most recent earnings release showed, the Street didn’t properly forecast Skechers’ operating margins. Analysts questioned the company’s ability to deliver necessary operating leverage while the domestic market was showing signs of uncertainty. Operating margins were roughly a 20% beat over analyst estimates, and only part of the better-than-expected EPS was a result of a more favorable tax rate.

The strong rally during the past few months was bolstered by the buzz around Trump’s tax reform and the positive effects that a lower tax rate would potentially have on Skechers’ bottom-line. However, it seems that the market has failed to keep up with the pace of Skechers’ improving fundamentals.

The black line in the chart below shows the YoY revenue growth, with the solid part showing and actuals and the dotted part showing analysts’ expectations. The Sentieo Index (which includes alternative data sets such as Google Trends and Twitter) demonstrates Skechers growth potential (dashed blue line), while Wall Street has very low expectations for revenue in the next few years, forecasting a significant deceleration (again, dotted portion of the black line). Analysts haven’t adjusted their expectations enough, and it’s likely that a big revenue beat is coming both in Q4 and in the following quarters.

Sentieo Index vs Revenue YoY

Wall Street continues to be skeptical about Skechers’ acceleration, despite underestimating Skechers’ revenue growth for four consecutive quarters and getting the margin picture completely wrong. Analysts also don’t seem to understand that Skechers’ management is offering particularly conservative guidance numbers, and has been mentioning better-than-expected results for a while.

In Q2, the management offered the following guidance:

Management Guidance – Q2

Both revenue and EPS were far above those levels, surpassing the higher end of the management’s guidance.

Something similar occurred in Q2, when revenue growth definitely surpassed the upper end of the management’s guidance. In the excerpt below, management highlights that the results were well above their own expectations:

Skechers Transcript – Sales

Perhaps management wants to set expectations low, or perhaps they have actually underestimated the sales acceleration. In any case, it’s probable that they have undervalued the potential growth in Q4 just as they did for the previous two quarters.

With sales guidance for Q4 at $860 to $885 million, the implied Y/Y growth rate would be between 12.5% and 16%, basically just in line with Q3’s growth rate even if we use the higher end of the guidance range.

The Sentieo index tells us something different. Since management has provided its guidance, the index has significantly accelerated, showing a strong confidence in Skechers. The guidance for Q4 was provided just before an inflection point of strong acceleration, shown by the Sentieo index dotted line below:

Sentieo Index and Guidance

 

We’ll be tuning into the earnings call on Thursday to see if Skechers has underestimated their performance again. To continue tracking SKX, and to study other tickers using our alternative dataset tools, sign up for a free trial with Sentieo.

try free Sentieo

Why Is The Fed Still Raising Rates? The Yellen Effect

This article was originally published in Forbes

Our second investigation of the Fed’s sentiment discusses the impact Chairwoman Yellen has had on the Federal Reserve since her rise to the Chair in 2014. We created and utilized our ‘FedSpeak’ lexicon to delve into the correlation between the Fed’s intentions and Yellen’s speeches before colleagues, Congress, and the press. Read the previous article and see what’s coming up next in our series here:

Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed
Why Is The Fed Still Raising Rates? The Yellen Effect
Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches
Predicting The FOMC Statement With Beige Book Sentiment Data

Federal Reserve Board Chairwoman Janet Yellen speaks during a news conference following a meeting of the Federal Open Market Committee September 20, 2017 in Washington, DC. Yellen announced that the Fed will not change interest rates this quarter. This is one of the last meetings before Chair Janet Yellen’s four-year term ends in February.

The Federal Reserve conducts the nation’s monetary policy under a mandate from Congress to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.

The Fed began its current round of rate hikes in 2015, and the Fed Funds target rate now stands at 1.25%, up from 0% two years ago.

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Announcing Our Partnership With 7Park For Alternative Data!

We’re pleased to announce that we are one of 7Park Data’s launch partners for their new API product. Starting today, 7Park customers who also use Sentieo can access their data in Plotter and Mosaic. 7Park’s data offerings available via API include web and mobile app traffic data, retail purchase data, and more.

The combination of 7Park data in Sentieo’s alternative data suite makes discovering alpha opportunities possible without hiring a quant. 7Park Data can be easily added to a chart or statistical analysis including other sources of alternative data, financial metrics like revenue or stock price, and your own data. Examples displaying how this data can be used are presented below.

In the words of one of our customers:

“Sentieo gave me a way to make sense of the data without having to spend budget on a full-time quant. Several points of my returns have been inspired.”

Contact your Sentieo Customer Success rep or e-mail us at hello@sentieo.com to get a demo of how this product can generate investment ideas for you. If you are not a current Sentieo customer, you can request a trial here.

 

 

Analyzing $NFLX Recent Earnings Beat With Alternative Data

Netflix’s stocked soared over 10% in after-hours trading last Tuesday after the Q2 earnings call in spite of an EPS miss at $0.15/share (vs. $0.16 projected). Since Netflix is still growing rapidly, the stock trades mostly on subscriber growth, rather than earnings. As you can see from the chart below, subscriber growth, especially in International Markets, blew out analyst estimates:

Netflix Subscriber Growth Vs. Estimates

Since subscriber growth is not as easily analyzed by the core public financial data companies are required to release, we used Sentieo to look at alternative datasets like keywords in earnings transcripts, search volume, Twitter mentions, and website traffic to analyze Netflix’s incredible performance

First, we looked at words tied to international markets that were referenced in transcripts using our earnings call Keyword Tracker:

Mentions of keywords in Netflix Earnings Call Transcripts

Notice that Europe, Asia, Korean, and Germany saw their largest number of conference call mentions ever when comparing to previous earnings calls. Reed Hastings continued to speak to success with content creation in Europe and Latin America, but also has his sights set on Asia:

Snippets from the most recent $NFLX Earnings Call

NFLX’s chief of content creation, Ted Sarandos, spoke specifically about Korea and Okja (a Korean-Hollywood collaboration that has been a huge hit for Netflix) both of which were surfaced in the keyword tracker above:
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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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