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We Identified Stocks We Thought Would Do Well and Bad with Rising Inflation, Here Is How They Are Doing So Far.

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

As many of us might know, inflation has been on the rise. According to the Bureau of Labor Statistics, the annual inflation as of September 2021 is 5.4 percent. In our previous blog post published on April 19, 2021, we identified 10 Nasdaq-100 stocks that we expected to do well with rising inflation and 10 Nasdaq-100 stocks that would not do well in such an environment. Using the MacroRisk Analytics® platform, we look at the performance of these stocks and compare them to how the Nasdaq-100 index as a whole has fared so far. In addition, we identify another two sets of 10 Nasdaq-100 stocks that we expect to do well and not do well if inflation rises. Financial advisors and investors need to be aware of how inflation might impact their portfolios and assets.

To perform the comparison, using the MacroRisk Analytics portfolios tool, I created an equally weighted portfolio of 10 stocks that were expected to respond positively to rising inflation (blue line in the chart below) and an equally weighted portfolio of 10 stocks that were expected to respond negatively (pink line). Then I compared these two portfolios to the performance of the Nasdaq-100 Index (green line) using the MacroRisk Analytics performance report. The chart below shows this performance from April 13 through October 13, 2021, a six-month period. (The starting date is April 13, 2021, because data as of this date were initially used in the previous blog post to identify the two sets of 10 stocks.)

As can be seen, the portfolio of 10 stocks that we expected to do well in a rising inflation environment (blue line) did indeed do better than the Nasdaq-100 Index (green line) and the portfolio of 10 stocks that we expected to do worse in such an environment (pink line). The performance of the latter portfolio (pink line) and the Nasdaq-100 Index was somewhat similar over the six-month time period.

The table below shows the return and risk characteristics of the two portfolios and the index. The “top 10 inflation” portfolio also had lower risk than the index as represented by the standard deviation and the lower semideviation statistics, a good feat considering this portfolio consists of only 10 stocks while the index has 102 stocks.

So far, we have identified how the stocks we selected six months ago have performed through the present day. Next, I use the MacroRisk Analytics screening tool to identify new sets of stocks that we expect to do well and not well if inflation rises.

The table below shows 10 stocks out of the Nasdaq-100 Index that we expect to have the largest positive response to inflation as a proportion of total economic risk as of October 13, 2021.

The third column represents the proportion of total economic risk that inflation represents for an asset. The higher the number, the more significant the expected effect of inflation changes are on an asset’s stock price versus the other 17 economic factors in the MacroRisk Analytics model.

The fourth column represents the expected percentage change in a stock’s price given a one standard deviation increase in inflation.

The table below shows 10 stocks out of the Nasdaq-100 Index that we expect to have the largest negative response to inflation as a proportion of total economic risk as of October 13, 2021.

In summary, this post analyzed the performances of two sets of stocks, identified in our previous blog post, that we expected to do well and not so well in a rising inflation environment. We then identified new sets of stocks using the most recent available data. Inflation is only part of the total economic risk, and other economic risks can have a big impact on the performances of individual stocks and portfolios. MacroRisk Analytics provides the proprietary and patented tools to help you measure these economic risks.

This post is possible thanks to MacroRisk Analytics®. This platform provides investment research for 30,000+ individual names as well as investor portfolios. The MacroRisk Analytics® model uses 18 macroeconomic factors to break down the economy’s impact on investment value. Using this patented research, our team has twice won the William F. Sharpe Indexing Achievement Award for ETF/Indexing Paper of the Year. Click here to access this award-winning investment research today! You can find our other blog posts by going to www.macrorisk.com.

Top 10 Nasdaq Stocks with Largest Relative Exposures to Inflation – April 13, 2021 Update

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

This post provides 10 stocks out of the Nasdaq-100 Index that investors can expect to benefit from a rise in inflation and 10 stocks that are expected to be negatively impacted by a rise in inflation. Financial advisors and investors need to be aware of how inflation is likely to impact their holdings and portfolios. We performed the analysis using the MacroRisk Analytics® platform as of April 13, 2021.

The Eta® profile by MacroRisk Analytics demonstrates an asset’s historical exposures to 18 economic factors in the MacroRisk Analytics model. CPI, or inflation, is one of these factors. If an asset has a positive exposure to inflation, we can expect it to benefit from a rise in inflation.

The MacroRisk Analytics platform makes it easy to identify stocks that have positive or negative exposures to inflation or any other factor in its model. Mondelez International (ticker: MDLZ) is one such company. According to its Eta profile shown below as of April 13, 2021, it has a large positive exposure to CPI as a proportion of its total economic risk (i.e., other economic exposures in the graph below). The MacroRisk Analytics model predicts the company’s stock price might increase approximately 27% with a one standard deviation increase in inflation, keeping other factors constant.

We used the MacroRisk Analytics screening tool to identify 10 stocks out of the Nasdaq-100 Index that one can expect to have the largest positive exposures to inflation as a proportion of total economic risk. Here are the results using data as of April 13, 2021.

The third column represents the proportion of total economic risk that inflation represents for an asset. The higher the number, the more significant the expected effect of inflation changes are on an asset’s stock price versus the other 17 economic factors in the MacroRisk Analytics model.

The fourth column represents the expected percentage change in a stock’s price given a one standard deviation increase in inflation.

Investors can expect Mondelez International (ticker: MDLZ) to have the largest positive inflation exposure as a percentage of its total economic risk (19.1%). If inflation increases one standard deviation, the stock’s price is expected to increase by about 27%, keeping other factors constant. The company operates in the confectioners’ industry and is one of the world’s largest snack companies with famous brands such as Chips Ahoy!, Ritz, Oreo, and others.

During the past 10 years, Mondelez International has enjoyed a positive exposure to inflation as demonstrated by the heat map shown below. Red represents positive and blue represents negative exposure to an economic factor.

Intuitively, this predicted positive response to inflation makes sense given that raw material costs are a small percentage of total operating costs, their businesses are not particularly labor intensive, yet, within their markets, they enjoy pricing power that allows them to raise their product prices in response to a surge in inflation.

The table below shows 10 stocks out of the Nasdaq-100 Index that are expected to have the largest negative response to inflation as a proportion of total economic risk as of April 13, 2021.

Micron Technology (ticker: MU) has inflation risk that represents 15.8% of its total economic risk. If inflation rises by one standard deviation, the stock’s price is expected to drop by approximately 38%, keeping other factors constant. The company operates in the semiconductors industry and provides memory and storage microchips.

Over the past ten years, Micron Technology’s response to inflation has varied. From May 2011 through approximately February 2018, it had a detrimental exposure to inflation (blue markings for the CPI factor) followed by a positive exposure (red markings) until about May 2020 and has recently reverted back to having a negative exposure to inflation.

Intuitively, this makes sense given that all but Kraft Heinz are technology companies where the sale price of their products are usually set by long term contracts, thus providing little short term pricing power when inflation surges.

This post presented stocks out of the Nasdaq-100 Index that have the largest positive and negative exposures to inflation risk. Given the recent expansionary fiscal and monetary policies, a rise in inflation is a possibility. Thus, it is essential to identify assets that one can expect to benefit from or be negatively impacted by an inflation rise. This identification allows one to adjust one’s portfolio appropriately.

This post is possible thanks to MacroRisk Analytics®. This platform provides investment research for 30,000+ individual names as well as investor portfolios. The MacroRisk Analytics® model uses 18 macroeconomic factors to break down the economy’s impact on investment value. Using this patented research, our team has twice won the William F. Sharpe Indexing Achievement Award for ETF/Indexing Paper of the Year. Click here to access this award-winning investment research today! You can find our other blog posts by clicking here.

Edited by Bob Hanisee and Rania Sullivan.

Economic Sensitivities of the Nasdaq-100 Index – March 19, 2021 Update

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

Recently, many of us had probably noticed that when the 10-year U.S. government bond yield increased, the Nasdaq-100 Index tended to drop in value. This post will demonstrate what other economic exposures of the Nasdaq-100 are using the patented 18-factor model created by MacroRisk Analytics®. Financial advisors and investors can use this information to better understand the risks and opportunities involved with an investment in the Nasdaq-100.

The MacroRisk Analytics model correctly identifies the relationship we had recently seen where the Nasdaq-100 would drop in value when the 10-year treasury yield increased. Using the Eta® Profile available on the MacroRisk Analytics platform, we can quickly identify this and other relationships the Nasdaq-100 has to other economic factors.

The Eta® measure in the graph below demonstrates the sensitivity of an asset to the economic factor. It reflects the expected change in an asset’s value given a one standard deviation increase in the economic factor. For instance, if the M2 Money factor increases by one standard deviation, the Nasdaq-100 is expected to increase 34.55% keeping other factors constant.

We can see that the Nasdaq-100 has a negative exposure to the intermediate government bond yield (i.e., the 10-year treasury yield). A negative exposure means that we can expect the asset to benefit if the economic factor decreases and vice versa. In other words, if the 10-year treasury yield increases, we can expect the Nasdaq-100 to drop in value holding other factors constant. This relationship is what we have recently seen happen in the market. While the chart above shows the economic sensitivities as of March 19, 2021, a similar relationship to the 10-year treasury yield existed at the beginning of 2021 before the interest rate spiked.

The chart also illustrates that the Nasdaq-100 does have other exposures to the economy, and in some cases, the profile deems these exposures to be stronger, more important exposures than the exposure to the intermediate government bond yield. For instance, we can expect the Index to have the biggest exposure to the M2 Money factor. This factor measures the money supply that includes cash, checking deposits, and easily convertible near money. In this case, the exposure is positive meaning that we can expect the Nasdaq-100 to benefit if M2 Money increases.

The Nasdaq-100 has the second largest exposure to the short-term government bond yield. This exposure is positive meaning that we can expect the Index to increase in value if the aforementioned factor increases and vice versa.

The table below demonstrates MacroRisk Analytics’ patented Eta® measures (i.e., economic sensitivities) of the Nasdaq-100 as of March 19, 2021. The table lists the sensitivities in descending order based on their absolute values.

This post’s goal was to help the reader understand the economic exposures of the Nasdaq-100 Index beyond what one may have deduced by observing the recent relationship between the 10-year treasury yield and its impact on the Nasdaq-100 value. Understanding the sensitivities of the Nasdaq-100 can help financial advisors and investors identify which economic factors are of more importance. This allows investment professionals to position their portfolios appropriately. 

This post is possible thanks to MacroRisk Analytics®. This platform provides investment research for 30,000+ individual names as well as investor portfolios. The MacroRisk Analytics® model uses 18 macroeconomic factors to break down the economy’s impact on investment value. Using this patented research, our team has twice won the William F. Sharpe Indexing Achievement Award for ETF/Indexing Paper of the Year. Click here to access this award-winning investment research today! You can find our other blog posts by clicking here.

Edited by Rania Sullivan.

Investing in Funeral Related Companies as a Potential Hedge for Covid-19?

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

Does investing in funeral related companies provide a potential hedge to Covid-19? Some financial advisors and investors may expect these companies to outperform when deaths are increasing because it would increase the demand for services and products of these companies. We will take a look at four publicly traded funeral companies and analyze their performance year-to-date using the MacroRisk Analytics® platform.

The four funeral related companies that will be analyzed in this post are shown below.

Performance Year-to-date

First, let us take a look at the performance of the four funeral companies versus the S&P 500 Total Return Index from December 31, 2019 through November 23, 2020.

We can see that the stocks of the four companies have underperformed the S&P 500 TR Index (the bolded light blue line) during this time period. During March of 2020, the stocks, except STON, fell somewhat similarly to the market. However, the stocks have not recovered as quickly as the S&P 500 TR Index since then.

Down-market and Up-market Betas

The down-market beta measures the downside risk of an asset. It helps understand what happens to the asset when the benchmark goes down. A down-market beta less than one means that the asset tends to lose less value than the benchmark when the benchmark goes down.

The up-market beta measure the upside “risk,” or the “risk” of earning money. It shows what happens to the asset when the benchmark goes up. A value less than one means that the asset does not go up as much as the benchmark.

The down-market and up-market betas for the four companies are shown below. These are calculated using the past 11 months of daily returns as of November 23, 2020 (i.e., year-to-date).

All of the down-market betas are less than one demonstrating that the stocks of these companies lost less value than the S&P 500 TR Index when the index went down. To help interpret the down-market beta, consider the down-market beta of 0.5476 for StoneMor Partners. This means that over the period of analysis, if the S&P 500 TR Index goes down by one percent, the stock goes down by 0.5476% on average. Or, if the index goes down by 10%, the stock is expected to go down by 5.476%.

All of the up-market betas are also less than one meaning that the stocks did not go up as much as the index when the index had its up days. The up-market beta for StoneMor was even negative meaning that when the S&P 500 Index went up, the stock lost value.

Yes, on the days when the S&P 500 was down, the stocks lost less value than the index. However, to act as a hedge against a market driven by the Covid-19 developments, more downside protection is expected (lower down-market betas), or even negative down-market betas are preferred. Negative down-market betas would be situations when a stock increases when the S&P 500 goes down.

Conclusion

In this post, four funeral companies were analyzed to determine if they could be invested in as a potential hedge against Covid-19. The logic behind this notion is that there could be more deaths due to  Covid-19 which would increase the demand for services and products provided by these funeral related companies.

Given the performance of the companies in 2020 and their down-market and up-market betas, these companies do not seem to be good hedges against the market that has been partially driven by Covid-19 developments. The companies actually underperformed the S&P 500 Total Return Index and did not exhibit strong downside protection from December 31, 2019 through November 23, 2020.

This kind of analysis is possible thanks to MacroRisk Analytics. The platform provides economic analysis of portfolios and thousands of individual companies, ETFs, mutual funds, etc. because The Economy Matters®.

Economic Stats of Pharmaceutical Companies Developing a Covid-19 Vaccine

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

This post will analyze and compare some pharmaceutical companies developing a vaccine for Covid-19 from an economic perspective using the Eta® statistics on the MacroRisk Analytics® platform. These statistics can assist financial advisors and investors in understanding what economic forces have been driving the stock prices of these companies and how these companies compare in terms of economic risk.

According to a Forbes article dated June 16, 2020, the following five pharmaceutical companies are developing a Covid-19 vaccine:

The table above presents only some of the companies developing a vaccine for Covid-19. (Moderna is another company, for example, that is developing a vaccine but was not analyzed in this post because its stock does not have at least three years of trading history).

These five companies will be compared using the FiveRisks report by MacroRisk Analytics as of November 6, 2020.

Economic Climate Rating

The first statistic that will be analyzed is the economic climate rating. It is a star rating ranging from one to five stars. A rating of one means that the current economy is expected to not be suitable for the asset (i.e., the economy is expected to provide headwind). A rating of three means the economy is expected to be neutral for the asset. A rating of five means that the current economy is expected to be suitable for and benefit the asset (i.e., the economy is expected to provide tailwind). Here are the economic climate ratings for the five companies.

Novavax had the highest economic climate rating of four meaning the economy is expected to be somewhat favorable compared to other companies for which the economy is expected to be neutral.

MacroRisk Level

The second statistic is the MacroRisk Level (MRL) which measures how sensitive an asset is to changes in the economy. The lower the MRL, the lower the asset’s economic risk is expected to be and vice versa. Here are the MRLs for the five companies and also the median, average, minimum and maximum MRLs for the S&P 500 index for comparison.

As can be seen, Novavax stands out withs a very high MRL of 1983. This is higher than the maximum MRL of 930 in the S&P 500 Index as of November 6, 2020 illustrating the high level of economic risk associated with the stock of this company.

Economy’s Influence

The economy’s influence measures how much of the stock price of an asset is driven by changes in the economy rather than company specific information. The higher the value, the more the asset is driven by the economy and vice versa.

Johnson & Johnson as well as Pfizer have low economy’s influence statistics demonstrating that the stock prices of these companies are believed to be driven more by company specific information than what happens in the economy.

Eta® Value at Risk

The Eta Value at Risk statistic measures the expected percent change in the price of an asset, up or down, given an unexpected event that has a five percent probability of happening (whatever this event may be). This is a measure of risk. The lower the statistic, the lower the expected risk of an asset is believed to be and vice versa.

Again, Novavax illustrates high expected risk with the Eta Value at Risk of 48.9%. This means that given an unexpected event with a five percent probability, its stock price is expected to increase or decrease by 48.9%.

Down-market Beta

The down-market beta measures downside risk. It is the expected percent change in the value of an asset when the S&P 500 Index (in this case) drops. If the down-market beta is less than one, the asset is expected to lose less value than the S&P 500 when the S&P 500 drops. If the down-market beta is higher than one, the asset is expected to lose more value than the S&P 500 Index when the index drops. The lower the down-market beta, the less risky an asset is expected to be and vice versa.

In terms of the down-market beta, all of the subject companies except one have lower risk than the average company in the S&P 500. Novavax has somewhat higher risk than the average S&P 500 company with the down-market beta of 1.14 which means that if the S&P 500 Index drops by one percent, the stock price of Novavax is expected to drop by 1.14 percent (i.e., if the S&P 500 drops by 10%, Novavax is expected to drop by 11.4%).

Summary

The goal of this post was to provide some statistics to analyze some of the pharmaceutical companies currently developing a vaccine for Covid-19 from an economic perspective. These statistics show where these companies stand in terms of economic risk in relation to the S&P 500 Index.

The table below will summarize the statistics presented earlier in this post. These statistics are as of November 6, 2020.

The statistics shown in this post can be accessed through the MacroRisk Analytics platform. This platform helps analyze portfolios and thousands of companies, mutual funds, ETFs, etc. with the economy in mind because The Economy Matters®.

Our “The Economy Matters Reports” are also available through Interactive Brokers, FactSet, Capital IQ, and Refinitiv.

When so many stocks are down, which are undervalued? MacroRisk’s Relative Value Index can help.

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

The COVID-19 virus continues to spread around the world and seems to have “infected” investors with fear and panic. The market’s volatility has spiked, and major indexes around the world have dropped from their recent highs. In times like these, panic and emotion seem to drive the market swings rather than the underlying economic conditions. Some financial advisors and investors might be trying to take money off the table before they lose more while others jump at this opportunity to purchase assets at fire-sale prices.

To assist financial advisors and investors with investment analysis, we will provide a list of 20 NASDAQ stocks with high market cap and estimate how overvalued or undervalued these stocks are using the Relative Value statistic provided by the MacroRisk Analytics® platform because a reasonable question always arises: is what I plan to purchase undervalued, overvalued, or fairly valued? While typical  analytics products emphasize accounting analysis or technical ratios to determine price valuation, the MacroRisk Analytics platform provides “a better window on the future”®.  Its patented and proprietary tools can help investors take emotions out of the investment decision-making process and focus on how the underlying economic values of their investments, including most stocks and funds traded in the U.S. and Canada.  Of particular note is the “relative value statistic” which presents the extent to which an asset is under- or over-valued; this statistic compares the Eta® price (i.e., MacroRisk’s statistical estimate of an asset’s intrinsic price) to the corresponding market price of the asset.

MacroRisk’s Eta® price estimate is computed using advanced data analysis and considers the specific impacts of these 18 macroeconomic variables:

  1. Short-term government bond yield
  2. Intermediate-term government bond yield
  3. Long-term government bond yield
  4. Corporate bond (BAA) yield
  5. Unemployment rate
  6. Corporate cash flow
  7. Housing starts
  8. Auto sales
  9. New durable goods
  10. Gold index
  11. Energy prices
  12. CPI (inflation)
  13. Monetary base
  14. M2 Money
  15. Euro exchange rate
  16. FTSE 100
  17. Tokyo stock exchange
  18. Agricultural exports

Similar to how factors such as the number of bedrooms, number of baths, square footage, etc. determine the price  of a house, these 18 macroeconomic variables determine the intrinsic value estimate, the Eta® price of an asset.

The relative value statistic is interpreted as follows:

Relative Value by MacroRisk Analytics Valuation Expectation
<1 Expected to be overvalued
1 Expected to be fairly valued
>1 Expected to be undervalued

To illustrate the relative value score, consider the following list of 20 large cap NASDAQ stocks and their corresponding relative value statistics as of 3/16/2020:

Name Symbol Relative Value as of 3/16/2020
CME Group Inc CME 1.361
Exelon Corp EXC 1.306
CSX Corp CSX 1.202
The Kraft Heinz Co KHC 1.161
Automatic Data Processing Inc ADP 1.131
Pepsico Inc PEP 1.128
Mondelez International Inc MDLZ 1.108
Microsoft Corp MSFT 1.102
Intel Corp INTC 1.099
Starbucks Corp SBUX 1.082
Apple Inc AAPL 1.078
Nvidia Corp NVDA 1.057
Intuit Inc INTU 1.043
Analog Devices Inc ADI 1.034
Equinix Inc EQIX 1.027
Qualcomm Inc QCOM 1.016
Comcast Corp CMCSA 0.962
Texas Instruments Inc TXN 0.949
Cisco Systems Inc CSCO 0.948
Marriott International MAR 0.943

According to the current economic conditions, even with all the current social volatility disrupting markets, 16 out of these 20 stocks presented seem to be potential buy targets because their relative value statistics are over 1; their market prices are substantially below MacroRisk’s statistically based  intrinsic values estimates.

During turbulent times that we are currently experiencing, it is ever more important to keep emotions in check while investing. The relative value tool statistic allows investors to take a step back from the speculation going on in the world and focus on whether an asset is expected to be under- or over-valued based on the current economy. The relative value information presented for 20 NASDAQ stocks above uses the underlying economic conditions expected to drive the values of assets over the long-term.

When you are considering changing your holdings, whether in a crisis or not, the Relative Value Index can help pinpoint undervalued opportunities.

www.MacroRisk.com provides relative value and other statistics as well as a selection of patented and  proprietary analysis tools for tens of thousands of stocks, mutual funds, ETFs, and other traded assets. The Relative Value Score for stocks and funds is also included in “The Economy Matters” reports available from numerous platforms.  Click here to see how MacroRisk Analytics can help you. 

Mr. Rolland Harris assisted with the preparation of this post.