What does a CEO want said about them a decade from now when they step down? We surmise that very high on that “legacy list” is that they were good stewards of capital, and that their decisions about capital use directly benefited shareholders and employees.
Over the past several months we have researched the implications of corporate decision-making, by analyzing various capital uses and their consequences.
Risk management is critical for the success of any investor – especially with regards to their high conviction positions, which often carry disparate and opaque risks. Today’s research shows how to best to hedge / replicate the returns of such positions with the goal of being exposed to only the company’s idiosyncratic risk, thereby avoiding unwanted exposures that are not part of the high conviction thesis.
At the start of each quarter, we provide a detailed summary of the just completed quarter with the goal of helping investors make better investment decisions, in addition to provide insights that will facilitate investor communications, client conversations, and quarterly letters. Furthermore, our quarterly report seeks to identify emerging risk management concerns and give investment advice.
In this, the last of our five-part series analyzing capital uses and their consequences, we assess corporate leverage. Previously we have analyzed buybacks, dividends, M&A, capital spending, and R&D. With materially higher interest rates over the last few quarters, we think it is timely to analyze the level and changes to corporate debt, both total and net, and the impact corporate decision-making about leverage has on equity performance.
In today’s note we focus on the key issues that have consistently surfaced in our recent investor conversations.
There is a tension between deteriorating macro condition and high earnings expectations, and the material reset in valuation. We think this creates some interesting long / short opportunities.
In this note, we analyzed several metrics and concluded through efficacy and parsimony that six signals – both level and change – across liquidity, volatility, and conviction by way of 13-F filings are good signals for identifying crowded stocks. We combined these six signals in multiple ways – equal-weighted, weighting liquidity more, weighting conviction more – into a set of proprietary crowding scores – in which we generally looked at beta-adjusted spread portfolios of the signal’s top quintile (“least crowded”) and bottom quintile (“most crowded”).