馃搱 SHARE PERFORMANCE: 3 FACTORS 馃搲
The most common question is: What determines share prices? And the most common and accepted answer is financial results. That is a half-truth. In a sense, price is related to some ratios and multiples based on them. However, some of them do not justify valuations, either by temporary losses or by expansion/contraction of multiples. Perhaps, it is more linked to common market manipulation, rather than a legitimate linkage.
In the spirit of knowing which item in the financial statements is most closely linked to the performance of a share, three main sections of the Income Statemen was chosen: Total Revenues, Gross Profit and EBITDA. They were selected because of:
1- Revenues: Many stocks quoted spite of net profit negative if it has revenues. The best multiple in this case could be Price to Revenues. If company has not revenues, is dead.
2- Gross profit: is relevant because it reflects the effectiveness from the most basic operations. Company can control their admin expenses (dismissals and recruitments), but if the cost is not controlled in a big margin, their management capacity will be limited and will undermine their final income.
3- EBITDA: is a non-GAAP filling that can be useful because erase the interest, taxes, depreciations and amortizations. Especially D&A is an expense discounted, but that does not mean that is paid in the period. This can boost their valuations. Some companies are evaluated by EV/EBITDA multiple by its versatility.
Moreover, the commonality between them is that they all tend to be positive. That cannot always happen with Free Cash Flow, Operating Margin or Net Income. Of course, if you choose the same boring stocks that everyone knows, there is no problem. Nevertheless, such companies are also not exempt from having negative results at some point in time. Moreover, considering "perfect company results" could lead to biased results because they only show one period, but were not always so.
The real problem is determining the price action of the most volatile and trended stocks, using only its financials. This are characterised by negatives EPS that growth a little or with higher fluctuations in the price can distort their multiples and make more complicated the process [The EPS trap]. In addition, considering some ratios such as ROIC might not be a clever idea because there is no correlation [Semiconductors Case]
The sample had the 50 most trended and known companies. Some of those with strong and higher returns and others, with a negative perspective (see at the end). It was taken the returns from December 2018 to August 2023. The growth of Total Revenues, Groos Profit and EBITDA was made from the annual Q4 2018 to annual Q2 2023, in the same way that the stock returns. The results were:
Share performance [2018-2023] | Causality | Correlation
% Revenues 32.58% 57.08%
% Gross profit 81.59% 90.33%
% EBITDA 76.60% 87.52%
The model had a multiple correlation of ≈ 90.41%, where the variables explained in ≈ 80.56% the shares performance. The estimation error was ± 26.53%. The change in Revenues was -0.0041x, in Gross Profit was -0.0314x and in EBITDA was 0.0089x, for each ± 1%, caeteris paribus. If there were no changes, the initial return was 35.71%. However, if only the Gross Profit is considered (the main correlation), the estimation error is ± 184%, where each ± 1% of changes produces a movement of 2.1086x in the returns. That is, only changes in Gross Profit could predict stock returns with an acceptable estimate, but AMD and NVDIA returns distorted the model because they were outliers.
Finally, the most important is not the exact values. They referrers a past situation with certain characteristics. The relevant would be to consider Gross Profit as a useful item to know how the price could act in the future. This was just one example with 50 companies, but the market has more than 500. However, if the NDX has 100, it might be significative.
The best analysis is yours!
J. Joel Padilla
List of companies:
TESLA, INC. (SLA)
ADVANCED MICRO DEVICES, INC. (AMD)
NVIDIA CORPORATION (NVDA)
ASML Holding NV (ASML)
KLA Corporation (KLAC)
LAM RESEARCH CORPORATION (LRCX)
APPLE INC. (AAPL)
MICROSOFT CORPORATION (MSFT)
META PLATFORMS INC. (META)
ALPHABET INC. (GOOGL)
AMAZON.COM, INC. (AMZN)
ENPHASE ENERGY, INC. (ENPH)
INTUITIVE SURGICAL, INC. (ISRG)
THERMO FISHER SCIENTIFIC INC. (TMO)
PAYPAL HOLDINGS, INC. (PYPL)
EXXON MOBIL CORPORATION (XOM)
CHEVRON CORPORATION (CVX)
SOLAREDGE TECHNOLOGIES, INC. (SEDG)
JPMORGAN CHASE & CO. (JPM)
AMERICAN EXPRESS COMPANY (AXP)
COPART, INC. (CPRT)
MASTERCARD INCORPORATED. (MA)
THE WALT DISNEY COMPANY (DIS)
DELTA AIR LINES, INC. (DAL)
UNITED AIRLINES HOLDINGS, INC. (UAL)
THE BOEING COMPANY (BA)
CATERPILLAR INC. (CAT)
ROYAL CARIBBEAN CRUISES LTD. (RCL)
NORTHROP GRUMMAN CORPORATION (NOC)
NUCOR CORPORATION (NUE)
AT&T INC. (T)
COSTCO WHOLESALE CORPORATION (COST)
MCDONALD'S CORPORATION (MCD)
NEXTERA ENERGY, INC. (NEE)
UNION PACIFIC CORPORATION (UNP)
NVR, Inc. (NVR)
MCKESSON CORPORATION (MCK)
UNITEDHEALTH GROUP INCORPORATED (UNH)
FORD MOTOR COMPANY (F)
GENERAL MOTORS COMPANY (GM)
LIVE NATION ENTERTAINMENT, INC. (LYV)
FEDEX CORPORATION (FDX)
WASTE MANAGEMENT, INC. (WM)
MONSTER BEVERAGE CORPORATION (MNST)
GILEAD SCIENCES, INC. (GILD)
XPO, INC. (XPO)
SIMON PROPERTY GROUP, INC. (SPG)
DUPONT DE NEMOURS, INC. (DD)
DARLING INGREDIENTS INC. (DAR)
MARRIOTT INTERNATIONAL, INC. (MAR)
Copyright: Joel Padilla 2023
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