Relativity of space – focusing on relative performance of peers in same sector
Among all drivers of companies’ profits, revenue always come on the first position and as well as one the most difficult to predict. Relatively, other factors such as raw materials supply, labor, operating, or government policies-related costs are less radical and easier to estimate. For consumer’ goods and service companies, revenue has often been determined by demand of consumers, which in return has been determined primarily by constant and quick changes in consumers’ favourite.
However, since it is historically impossible to accurately predict how and when consumers’ favourites shift from one product/service to another, we think one of investment strategies is to find a way to bypass, as much as possible, this uncertainty of betting on consumers’ behaviors. The core concept and method we used to complete our relative analysis and select comparable data is just on the basis of thinking above by narrowing down industries to the smallest groups/segments where all companies in the industry or sector are providing the same products and services to the same segment of consumers.
In this situation, when our focus is narrowed down on similar products/service within in the same region and with similar culture and economy such as north America market, all external factors, especially the shifting of consumers’ favorites, that exert influence on the performance of companies in that sector should be same to some extent and in short term.
Therefore, when the influence from consumers’ preference is same, what determine the financial performance of different companies may be only from other factors of internal company operating and management such as manufacturing cost, selling and management expenses, financing. Because those internal factors are relatively more likely to be traced from historical data and also be compared, it makes it possible for us to assess relative performance of same sector companies.
Relativity of time – focus on relative performance of stock of the same company on different earning seasons
Other than the intrinsic performance of a company itself, how the major investors/market evaluates its intrinsic value may be another key factor to determine the price of stock in a short term. Apparently different investors may apply different models/multiples/benchmarks, which are influenced by their views on macro-economy, industry forecasting, and company-specific risks, to value the stock.
However, since it is realistically impossible to quantitatively assess the influence on price of stocks of different investors, we think one of strategies is to find a way to bypass the uncertainties from betting on investors’ behaviors. The core concept and method we used to complete our relative analysis and select time serial data is just on the basis of thinking above by focusing on one stock with same institute shareholders and with unchanged or one-way changed fundamental situation/models in two consecutive earning seasons.
In this situation, when our focus is narrowed down on such a company described above, the deviation of price resulted directly from deviation of assessments of different investors on sales growth or margin changes in long term can be ruled out to some extent and in short term.
Therefore, when the influence from investors’ behavior is same, what determine the stock performance of a company may be only from the short term growth in sales or changes in margins, which are relatively more likely to be measured.