Resources
Research
08/17/2022
Is There a Playbook for an Inverted Yield Curve?
We have been surprised that during recent meetings the subject of the inverted yield curve rarely surfaces. The market sell-off earlier in the year was at least partially the result of a higher probability being assigned to stagflation. The 2-year, 5-year, and 10-year yields have been fully inverted since July 5th (it was April 1st for the 2-year vs. the 10-year) and the market sold off hard in anticipation. Of the nine inverted-curve cycles in the last half century, SP500 returns this cycle have been the most volatile, indicative of the differing paths that may unfold, and the challenge to forming an “inverted yield curve playbook” for equity investors.
07/22/2022
Capital Deployment and Shareholder Value Creation
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.
07/15/2022
How to Improve Your Risk Management
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.
In this note, we offer our “how to” approach to building hedge baskets, illustrating how a combination of quantitative and fundamental knowledge are required to optimize the process – plus six case studies of high conviction names today, which pose unique challenges and have varying conclusions about the underlying risk and hedge potential, and finally our “how to” approach for monitoring these existing baskets.
07/03/2022
What Really Happened in Q2?
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.
06/29/2022
How Much Will Downward Revisions Matter?
Sell-side analysts have a long-history of being overly optimistic about earnings expectations. Forward earnings data have existed since 1978, and on average analysts expect 14% earnings growth on January 1st of a given year, and the actual growth rate has been closer to 7%. For the last 20 years, we have consistently seen downward revisions, except during economic troughs, when, predictably, the analysts all get collectively too bearish at the cycle bottom.
In this note, we examine that while negative earnings revisions are virtually guaranteed, the market can still appreciate or have multiple expansion while earnings expectations are being downwardly revised.
06/27/2022
No Longer the Lever”age” of Innocence
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.
06/17/2022
What Should You Do Now?
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.
06/10/2022
Trivariate’s Proprietary Crowding Score
Investors are always interested in what other investors are doing and seem particularly focused on crowding when there is a risk-off regime.
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”).
06/03/2022
2022 Mid-Year Outlook
We provide a detailed mid-year summary of our research and forward outlook, which is designed to help investors to identify emerging trends and risk management concerns, find new long/short ideas, and help with all upcoming communications. This note addresses the current macro setup, perspective on the recent drawdown, earnings, risks, long/short ideas, and more.
05/27/2022
An Assessment of Revenue Growth
With the NASDAQ down 25% year-to-date and many individual securities down 50-80% over the last 15 months, expectations about future revenue growth have been meaningfully altered, and frankly, the growth outlook is particularly uncertain. We have no doubt that 2022 and 2023 revenue growth will be important determinants for ultimate winners and losers in the stock market, and that is the catalyst for today’s research.
In this note, we take an unemotional look at longer-term revenue growth trends, multiples, and near-term expectations for growth to see if the meaningful market pull-back implies any relative opportunities. While quantitative tightening requires a different investing roadmap than quantitative easing, we do not believe all innovation is dead. Even if growth stocks continue to lag until any directionally dovish commentary surfaces, we want to provide “growth-neutral” pair trades for stock pickers in this environment.
05/19/2022
Pair-Trading Cyclicals Into a Recession
The investment landscape is presenting different and potentially unconventional ways to outperform as the Fed implements quantitative tightening. One possible paradigm shift could be how investors think about buying cyclicals given how anticipatory markets have been of a recession-induced earnings decline.
Perhaps the mantra of selling when they are cheap and buying when they are expensive will be modified going forward, particularly for those cyclicals where current excess profits could vastly improve income statements and balance sheets for sustained periods of time. In light of this thought, we evaluated thirteen historically cyclical industries in this note to see where there are potential long / short opportunities.
05/12/2022
95 Years of Data Putting This Sell-Off in Context
The market drawdown has caused continued investor angst, and most of our client meetings have had an increasingly bearish overtone. Few, if any, want to take the bull side in a bull-bear debate.
Every market pundit tries to predict the market trough by using a combination of sentiment, positioning, fundamentals, macro, and valuation to reach their conclusion. Because many of those metrics do not have consistent predictive value, we thought it would be instructive to take a step back and look at the longer-term history of price performance to contextualize this current sell-off.
05/09/2022
A Sector Ripe for Short Ideas: May 2022 Utilities Overview
Many long-only portfolio managers do not view utilities as particularly important, given the bench-weight is around 2.6%, and most hedge funds do not cover the space. However, as the market has been declining, and it feels late to short hyper growth stocks (many of which are down more than 50% YTD), our view is that CIOs should be looking to the utilities sector to find short ideas. In this note, we examine utilities front to back and give our case for why this sector is underexamined and what to look for in short/long ideas.
05/01/2022
Marking-to-Market the Market: April 2022 Earnings Season
In this note, we digest and analyze the first 10 days of earnings season, with a focus on three major themes: the US consumer, growth stocks, and a recap of earnings. All things considered, we continue to recommend energy as our top sector and offer seven reasons we are still bullish.
04/22/2022
Four Things That Matter Now: April 2022
During our recent investor meetings, four topics have consistently surfaced. We address those questions in today’s note. Topics include whether the market is discounting higher rates, growth stocks, energy, and the greater meaning of the recent NFLX miss.
04/18/2022
Who Adds and Destroys Value?
Over the past several months we have researched the implications of management decision-making, by analyzing various capital uses and their consequences. This our fourth of five studies, as we previously have analyzed buybacks, dividends, and M&A. In this note, we investigate trends in the levels and changes in capital and R&D intensity, current trends, and the efficacy of these signals in terms of predictive value for stock performance.
04/04/2022
What Really Happened in Q1, and our Q2 Advice
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.
03/28/2022
Can the Fed Thread the Needle?
A key investment debate today is whether the Fed can “thread the needle” and raise rates without causing a recession. Given that the US consumer is so pivotal to the recession debate, we analyzed key metrics that make up our proprietary consumer gauge and looked at margins and multiples for various consumer stock cohorts to find dislocations and opportunities – and have a few observations and recommendations.
03/22/2022
Trivariate's Quantitative Framework: March 2022
We detail some of the unique aspects of our quantitative framework, including cohort formation, signal transformation, dynamic grossing, and risk management. We believe this approach can be useful for bottom-up stock pickers seeking to pick from a better pool of names, rigorously manage gross exposures, and avoid risks such as crowding.
03/17/2022
The Case for Small Caps
As we noted at the beginning of the year, SIZE matters. Small caps have had their worst 18-month period of underperformance relative to large caps in the last twenty years, other than during COVID and the Financial Crisis.
In this note, we utilize our proprietary macro-based framework to see if there are certain macro conditions consistent with small cap outperformance, along with examining historical discounts and current margins in small vs large caps. From this, we conclude now may be the inflection point for a small cap turnaround, and give our current top small cap ideas.
03/10/2022
is There A Post-Energy Spike Playbook?
In light of the recent surge in oil prices, and uncertainty among investors as to what the appropriate playbook is, we examined prior oil spikes in search of patterns. We found six spikes – defined as breaking a threshold of 25% price increase over a 6-month rolling window – in the last 20 years, lasting a median duration of 70 days, and moving around 20% higher on average after the initial tipping point. After looking at these events, we have a few conclusions.
03/01/2022
SP500: A Constantly Enhanced Moving Target
The SP500 is the most followed benchmark for equity investors. In today’s report we take a step back from the recent market turbulence and focus on one of the biggest challenges of beating the SP500 – additions / deletions to the index. For context, over the last 20 years, on average about 5.5% of SP500 companies are added and deleted each year. We decomposed the substantial differences between stocks that are added and dropped from the index to understand the impact. Further, to capture some of the performance of the additions and avoid that of the deletions, we created two proprietary “potential add and potential drop” baskets to the SP500 to create alpha from names just below the top 500 in market cap.
02/25/2022
Rates, Growth, War, and Stocks
A constant investor question we get is “what playbook should we apply?” The last few months have been stressful for markets, as all of us try to find a relevant historical analog to apply to the next several months. What has happened the last three months? A huge change in the perception about interest rates fueled by multi-year highs on inflation, morphed into a “classic” growth scare, and now a war has created more fodder for the “risk-off” mentality. In the end, however, there are no historical periods that closely parallel today’s regime. In today’s research, we contextualize changes to perceptions about rates, growth scares, and wars to provide some analysis amidst the volatility.
02/17/2022
Thoughts on TMT
Over the past several months we have done a lot of work on growth stocks, and various frameworks for investing in growth. The result of that has been number of ways to generate ideas in the space. With the Nasdaq down 10% YTD, and many individual names down far more, we have received many investor questions asking for us to contextualize the sell-off. This short deck is the “best of” those TMT themes.
02/15/2022
Crowding: Risk and Opportunity
We established a systematic approach to analyzing the high conviction ideas of money managers through their 13F filings. We used this approach to inform recommendations about position sizing, and sometimes whether we would even buy or short a stock. While 13F filing data are lagged, and we do not know any manager’s real exposure as we are not assessing the options market or any short positions, we found it instructive to define a proprietary universe of fundamental managers, define high conviction, and use our quantitative models to improve our ability to find superior and inferior groups of equities.
02/10/2022
Focus On Dividends
We took a detailed look at dividend-related strategies given the massive shift in the perception about the path of interest rates. This report is part of our ongoing research on capital use and its consequences.
We believe there is above normal potential for dividends to matter going forward given the pending Fed lift off and historically wide valuation dispersion among the dividend yielders. Our quantitative models that specifically focus on dividend-yielding stocks are effective for picking winners / losers among this cohort.
02/08/2022
Trivariate Talks Episode 1: Jake Doft (Highline Capital)
We are pleased to share our inaugural podcast: a conversation with Jake Doft, Founder and CIO of Highline Capital. Jake founded his fund in 1995 and has a unique ability to articulate his perspective. We discuss several topics during this 45-minute conversation, from the ever-evolving investment landscape to more recent phenomena like blockchain/crypto, cannabis, and psychedelics. Jake also shares perspective on his investment process and some of his favorite ideas.
01/28/2022
Time To Buy Growth
We discuss the recent QQQ and SPX sell-off, merited in part by a change in macro conditions and perceptions about growth. Financial conditions have materially tightened and are now the least “loose” since early in 2021. The 2022 US GDP forecast is about 25bps lower from its peak late in 2021, having slowly declined, without a single uptick.
Our view is that risk-reward for US equity investors is attractive today. Typically, what matters is positive YoY earnings growth. Although earnings estimates have come down for 2022 over the last several months, earnings are still likely to grow. This fuels our growing optimism. Whether or not there will be growth is THE key investment debate.
We analyzed which industries and signals typically do best from this point onwards. Valuation generally failed and growthier metrics generally did well.
01/21/2022
It’s Not the Change in Rates, It’s The Perception About the Change in Rates
We did some new work on interest rates that go beyond the basic measurement of the relationships between historical stock performance and the 10-year yield that we initially did over a decade ago.
We have long thought that what matters to investing is changes to perceptions about growth and changes to perceptions about rates. In that light, we analyzed the Fed Funds future curves over multiple horizons (6,12,24, etc. months) minus the Fed fund rate as a proxy for changes in perception of interest rates vs. subsequent stock returns.
01/13/2022
How Are We Going To Make Money in 2022?
Our 2022 outlook is focused on long and short stock ideas followed by some analysis on changes in multiples and market dynamics. Though we do not do deep fundamental analysis as a firm, these stock ideas are ones that embody the themes of our research. They are meant to stimulate thought and idea generation for our clients. Please do not hesitate to contact us to discuss our work.
01/04/2022
What Really Happened in Q4 and Q1 Investment Advice
We provide a detailed quarterly summary to help investors prepare for their quarterly investor communications as well as identify emerging risk management concerns. We break our quarterly analysis into several areas of interest: performance facts, factor efficacy, the opportunity set, corporate profitability, macro / economic developments, and data from 13F filings and insider transactions.
12/17/2021
Opportunities in the Healthcare Sector
We have seen a massive deviation in healthcare sector stock performance in 2021. Given the idiosyncratic nature of the sector, meaningful performance deviation is normal. However, this magnitude of performance deviation catalyzed us to look for valuation / growth disconnects and search for opportunities.
12/08/2021
Less Opinion, More Analysis: A Systematic Assessment of 150 Macro Variables
The recent market volatility started as a result of opinions over a perceived Fed pivot and the new COVID variant. Corporate commentary generally indicates a slow path toward the resolution of the logistics, transportation, and supply-chain bottlenecks induced by COVID, with many suggesting normalization is expected in the second half of 2022, albeit with some variability depending on product. Given the risk-off / risk-on trading volatility, we took a step back to analyze macro trends and make a data-driven conclusion about the environment.
11/28/2021
The Power of First Impressions: The Market's Reaction to Deals has Persistent Value
With lots of questions about the M&A environment, big company break-ups (GE and JNJ), and companies trying to grow, expand margins, or change their multiple, we evaluated the market’s reward and penalties for deals. We found that the initial market reaction to a deal has predictive value, especially for banks and value stocks.
11/18/2021
The Nifty Ninety: A Framework for Picking Stocks that are $100 Billion Cap. or Larger
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.
11/14/2021
Our View of Inflation and Speculation
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?
11/12/2021
Do Stock Buybacks Destroy Value?
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.
11/07/2021
Gross Margins Matter
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.
11/04/2021
Is Crypto Performance a Risk to Monitor?
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.
10/27/2021
Melting Ice Cubes
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.
10/21/2021
Is a New CEO Good?
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.
10/14/2021
Semiconductors and Software: The Revenue and Margin Playbook
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.
10/05/2021
What Really Happened in Q3 and Q4 Investment Advice
We provide a detailed quarterly summary to help investors prepare for their quarterly investor communications as well as identify emerging risk management concerns. We break our quarterly analysis into several areas of interest: performance facts, factor efficacy, the opportunity set, corporate profitability, macro / economic developments, and data from 13F filings and insider transactions.
10/01/2021
How to Identify Compounders
If you want “compounders” focus on companies that consistently have YoY gross margin growth. Persistent gross margin expansion is a better predictor of future returns than sustained revenue growth or net margin expansion, though all are better than just picking the stocks that went up the most consecutive quarters relative to the market.
09/24/2021
Industrials Will Underperform
With a roll-over in key variables associated with economic activity, the aggressive earnings growth expectations embedded in the consensus outlook for industrials stocks is worrisome. Relative estimate achievability into 2022 seems way below average for this group, and we would be selling longs / initiating new shorts today.
09/15/2021
Trivariate's Quantitative Framework
We detail some of the unique aspects of our quantitative framework, including cohort formation, signal transformation, dynamic grossing, and risk management. We believe this approach can be useful for bottom-up stock pickers seeking to pick from a better pool of names, rigorously manage gross exposures, and avoid risks such as crowding.
09/03/2021
Consumer: 2 Strategies for Investing in Consumer Stocks
Our consumer activity gauge leads us to believe the US consumer remains in solid shape. With August consumer earnings showing more large beats than misses, but also some stock volatility following the earnings reports, many investors have been asking about the consumer playbook from back-to-school through year-end…
08/27/2021
5 Reasons Alpha Generation Has Been Challenging and 3 Ways to Deal With It
We have traditionally used valuation dispersion, company-specific risk, and pairwise correlation as quantitative metrics to suggest whether the environment is reasonable for alpha generation. In summary, the environment has looked more attractive than average. Yet, few managers have been performing in-line with our expectations. Hence, we analyzed the data with more granularity and found five meaningful reasons why alpha generation has been more challenging in 2021…
08/11/2021
Are You Sure You Need BATJ?
Many US equity managers have substantial positions in Chinese ADRs like Baidu, Alibabe, Tencent, and JD.com. With Chinese equities sharply selling off over the last several weeks, we investigated BATJ exposures through the lens of US equities. We conclude that US investors need to be highly confident in the alpha from BATJ to take on the incremental risk of owning them…
07/29/2021
Banks: 4 Controversies and 3 Variables to Monitor
We take a detailed look at the banks sector and uncover four investment controversies facing bank stock investors and three data points to monitor. We think these concepts apply broadly to investors in other industries as well…
07/21/2021
Where We Are and What We Should Do
We created twelve proprietary indices using over 100 variables that systematically process “macro” data. We smooth and transform the data to create twelve gauges of where we are in the investing world today. We then measure model efficacy during various regimes and use performance to recommend gross exposures. Today we recommend grossing up the following…
07/11/2021
Trivariate's Second Half Outlook
We believe that the second half of the year should be good for alpha generation. On inflation, we see disinflationary forces eventually surfacing again. The cycle is rhyming the 2009-10 recovery in many ways. We prefer large cap. over small but would be balanced on growth vs. value…
07/03/2022
What Really Happened in Q2?
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.
