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Home Wealth Management

How Quant Models Uncover Opportunities – Validea’s Guru Investor Blog

admin by admin
March 29, 2023
in Wealth Management


By Justin Carbonneau (@jjcarbonneau) —

In my previous article, “Unlocking the Market’s Mood,” we explored various methods of gauging investor sentiment in stocks. In this article, we’ll delve into how different investing models on Validea employ some of these sentiment indicators to find their way into the fundamental models we run, including analyst earnings revisions, buy and sell recommendations, insider buying, stock buybacks, and momentum.

The Earnings Revision Model – Capturing Wall Street’s Mood

Our Earnings Revision model on Validea is based on a research paper by Wayne Thorp, “How to Profit from Revisions in Analysts’ Earnings Estimates.” The model focuses on companies with upward revisions in analyst earnings estimates, often coupled with analyst buy/sell ratings. The Earnings Revisions model considers the following criteria to determine if a company has earnings revision strength and is viewed positively by analysts:

  1. Sufficient Analyst Coverage: The stock must have at least four analysts covering it.
  2. Current Year Estimate Revisions: The current year EPS estimate must be greater than it was one month ago.
  3. Next Year Estimate Revisions: The EPS estimate for the next fiscal year must be greater than it was one month ago.
  4. Current Year Up and Down Revisions: The company must have more than one positive current year estimate revision in the past thirty days and no negative revisions.
  5. Next Year Up and Down Revisions: The company must have more than one positive estimate revision for the next fiscal year in the past thirty days and no negative revisions.

Companies with upward revisions in earnings are viewed more favorably by Wall Street, indicating positive investor sentiment among analysts. The table below uses our Guru Stock Screener to highlight some of the top scoring stocks in the Earnings Revisions model as of today.

Ticker Name Earnings Revision Score Price Mkt Cap (mil) P/E LT EPS Growth Dividend Rel. Str.
URI UNITED RENTALS, INC. 100 372.83 25869 12.5 32.0% 1.6% 76
TOL TOLL BROTHERS INC 100 58.49 6477 5.1 26.8% 1.4% 90
PARR PAR PACIFIC HOLDINGS INC 100 28.54 1733 4.7 59.2% 98
TGLS TECNOGLASS INC 100 38.66 1843 11.8 90.3% 0.9% 95
KNSL KINSALE CAPITAL GROUP INC 100 293.5 6779 42.7 46.4% 0.2% 92
MT ARCELORMITTAL SA (ADR) 100 28.41 24721 2.9 9.0% 0.8% 54
AMK ASSETMARK FINANCIAL HOLDINGS INC 100 30.78 2275 22 52.9% 94
ASC ARDMORE SHIPPING CORP 100 15.14 621 4.5 3.0% 99
Source: https://www.validea.com/guru-stock-screener

Shareholder Yield Model – Importance of Stock Buybacks

Stock buybacks have become more common over the past two decades. Companies that buy back their shares indicate to the market that management has confidence in the company’s financial stability and future prospects. They believe that using cash to buy back stock will increase long-term shareholder value.

There are a few models on Validea where stock buybacks are important. The Shareholder Yield model we run is taken from Meb Faber’s book, “Shareholder Yield: A Better Approach to Dividend Investing.” Shareholder yield measures all the ways a company returns cash to shareholders, including dividends, buybacks, and debt reduction. In addition to the Shareholder Yield model, our Patient Investor model, based on Warren Buffett’s approach in “Buffettology,” also rewards buybacks. The model looks for a declining number of shares outstanding over the last five years.

The table below combines the Shareholder Yield model with the Patient Investor model (Buffett screen) to find stocks that score highly based on both models.

Ticker Name Patient Investor Shareholder Yield Investor Price Mkt Cap (mil) P/E LT EPS Growth Dividend
ABG ASBURY AUTOMOTIVE GROUP, INC. 80 80 198.54 4306 4.5 48%
URI UNITED RENTALS, INC. 79 80 372.83 25869 12.5 32% 2%
WSM WILLIAMS-SONOMA, INC. 100 85 118.87 7873 7.3 41% 3%
DKS DICK’S SPORTING GOODS INC 86 85 135 11558 12.8 41% 3%
LCII LCI INDUSTRIES 96 80 105.23 2650 6.8 19% 4%
MED MEDIFAST INC 100 85 99.1 1075 7.8 29% 7%
RHI ROBERT HALF INTERNATIONAL INC 100 80 76.2 8207 12.7 13% 3%
SEIC SEI INVESTMENTS CO 79 80 55.47 7448 16.1 4% 2%
CHRW CH ROBINSON WORLDWIDE INC 93 80 96.46 11236 13.2 10% 3%
CATY CATHAY GENERAL BANCORP 79 80 34.81 2526 7.2 13% 4%
Source: https://www.validea.com/guru-stock-screener

The Motley Fool Model – When Insider Buying Counts

Another direct sentiment indicator of management bullishness is a high degree of insider ownership or aggressive insider buying. When executives are personally buying stock, they are putting their own money into the shares and have an even bigger incentive to drive strong business results and potentially higher stock prices. Our Small-Cap Growth model, based on The Motley Fool Investment Guide, rewards stocks with at least 10% insider ownership. Our growth strategy based on Martin Zweig’s book, “Winning on Wall Street,” wants to see the number of recent insider buys to be at least three with no insider sells.

The table below combines the Growth Investor approach (Zweig) and The Motley Fool quant screen to find stocks that are favored by both. I added an additional filter of at least 10% insider ownership to further refine the list.

Ticker Name Growth Investor Small Cap Growth Price Mkt Cap (mil) P/E LT EPS Growth Dividend
CALM CAL-MAINE FOODS INC 85 72 55.27 2439 5.7 23% 6%
AMK ASSETMARK FINANCIAL HOLDINGS INC 85 91 30.78 2275 22 53%
CCBG CAPITAL CITY BANK GROUP, INC. 85 83 30.25 515 12.8 22% 2%
BSVN BANK7 CORP 85 83 24.85 227 7.7 25% 3%
VOC VOC ENERGY TRUST 85 76 8.25 140 6.5 19% 15%
PBBK PB BANKSHARES INC 89 72 14.12 40 31.3 30%
SSBK SOUTHERN STATES BANCSHARES INC 89 83 22.89 200 7.6 50% 2%
LMST LIMESTONE BANCORP INC 85 76 23.1 176 9.8 8% 1%
CZFS CITIZENS FINANCIAL SERVICES INC 85 76 79.32 315 10.8 12% 3%
EFSI EAGLE FINANCIAL SERVICES INC 89 72 33.96 119 8.2 13% 4%
Source: https://www.validea.com/guru-stock-screener

Quantitative Momentum Model – Investors Voting With their Dollars

The Quantitative Momentum model is a pure momentum-based model used to identify stocks with strong and consistent momentum. The model rewards stocks with strong price momentum, which may be the ultimate investor sentiment indicator, as strong momentum indicates that investors of all types are buying the shares and bidding up the price.

The Quantitative Momentum model is based on the book “Quantitative Momentum: A Practitioner’s Guide to Building a Momentum-Based Stock Selection System”, written by Wes Gray and Jack Vogel. The model identifies stocks that have strong price momentum over the past 12 months and rewards consistent momentum over stocks that have produced a more volatile ride.

The table below highlights the top-scoring stocks through the lens of the Quantitative Momentum model.

Ticker Name Quant Momentum Investor Price Mkt Cap (Mil) P/E LT EPS Growth Dividend Rel. Str.
RS RELIANCE STEEL & ALUMINUM CO 94 256.18 15109 8.6 34.1% 1.6% 93
ZEUS OLYMPIC STEEL, INC. 100 51.34 571 6.5 64.3% 1.0% 94
XOM EXXON MOBIL CORP 94 105.8 430710 8 36.6% 3.4% 91
WIRE ENCORE WIRE CORP 94 175.73 3157 4.8 81.6% 0.1% 95
ABG ASBURY AUTOMOTIVE GROUP, INC. 94 198.54 4306 4.5 47.8% 88
CVLG COVENANT LOGISTICS GROUP INC 100 34.05 451 4.9 78.0% 1.3% 95
PARR PAR PACIFIC HOLDINGS INC 100 28.54 1733 4.7 59.2% 98
MPC MARATHON PETROLEUM CORP 94 128.91 56930 4.5 69.1% 2.3% 96
GWW WW GRAINGER INC 100 671.66 33759 22.2 25.2% 1.0% 93
ASC ARDMORE SHIPPING CORP 100 15.14 621 4.5 3.0% 99
Source: https://www.validea.com/guru-stock-screener

In conclusion, by considering both sentiment and fundamental factors, investors can make more informed decisions and potentially uncover new opportunities in the market. Sentiment indicators are just another tool that investors have at their disposal for stock analysis and investment idea generation. Whether using quantitative models like Validea’s, fundamental analysis, or a combination of both, investors should always approach the market with a disciplined, long-term mindset.


Justin J. Carbonneau is VP at Validea & Partner at Validea Capital Management.
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