Research

Ten years ago, there were roughly 30 companies in the US equity market that had a market capitalization greater than $100 billion. At that time, most generalist portfolio managers had formed investment views of these companies, had seen the management teams present or met them over the years, and had a pretty good command of the investment debates for nearly all of these companies. However, today there are 93 companies that have greater than 100b market capitalization – double the number of companies that reached this exclusive barrier three years ago. These names account for roughly 60% of the total market cap. of the SP500. For equity investors whose performance is directly (or even indirectly) benchmarked to the SP500, it has never been more important to be able to generate performance from this exclusive club.

Inflation and speculation were the two most popular questions that surfaced during our dozen meetings last week in the Southeastern part of the US and in NYC. The CPI print this week sparked a fresh round of inflation-related questions from equity investors. Rivian’s IPO has been flagged by many as another example of rampant investor speculation. Given that backdrop, we think two critical questions are: 1. What is the best positioning for tapering, inflation, and the eventual rising of the Federal Fund rates? and 2. How should we think about momentum vs. mean-reversion in more speculative investments?

We explain why we are bullish on US Equities, and identify and address the risks of damaged earnings and valuation. We think US Equities are a treat, not a trick.

Gross profitability is the key investment controversy in today’s market. We reached this conclusion after several months of creating investing frameworks, analyzing risks and sectors, and, more recently, after processing this quarter’s earnings. Here, we show three research analyses we did in the last few months all resulted in the same conclusion – the importance of gross margin expansion for subsequent stock performance.

We evaluated the efficacy of buyback yield as a signal for subsequent return among public companies. Conventional wisdom is that buybacks are a sound strategy for management teams trying to boost their earnings per share growth and subsequent stock performance. Today’s research shows that this is no longer an effective strategy.

A critical part of Trivariate’s research objective is to identify and measure portfolio risks in unique ways and to evaluate emerging risk factors. With our mantra being “if risks didn’t change anyone could do risk management” we thought timing was good to establish a framework for measuring crypto risk through the lens of US equities.

Our latest market overview: a comprehensive document containing the best of our recent work and up-to-date views.

We identify the two metrics most important for identifying consistent underperformers: consistently high accruals and poor beta-adjusted momentum. Other metrics, such as share loss, margin contraction, and downward EPS revisions do not incrementally help identify underperformers on average. We conclude the note with short ideas.

We analyzed stock behavior following the announcements of new CEOs. Stocks making new CEO announcements underperform on a volatility-adjusted basis, meaning short of some deep understanding of the new CEO’s strategy, exiting / shorting stocks with a new CEO is on average prudent. The cumulative performance takes nearly 18 months to catch up to the average stock.

Back on October 1, 2002, we initiated as the US Semiconductor analyst at Sanford C. Bernstein & Co, with a note title “Share Gainers and Margin Expanders Are Multiple Expanders”. Nineteen years later we wanted to research the relevance of share gain and margin expansion in software and semis to identify dislocated stocks that may signal an investment opportunity. Going “back to the basics” of revenue growth vs. peers and margin expansion seems timely today.