Shopping For Alpha:

Cross-Section of Returns Explained by Industry KPIs

Can analyst forecasts of industry-specific metrics generate alpha in a cross-section of returns in the restaurant and retail industries?

Every industry has its preferred measures of operating performance. Analysts provide detailed information about these KPIs to investors who may use them to evaluate industry peers in more differentiated ways that general accounting metrics such as revenue, earnings, and EBITDA multiples do not neatly capture.

In seeking an answer to this question Visible Alpha’s data science team demonstrates that two popular metrics for retailers and restaurants, comparable sales and operating margin growth, generate significant long/short spreads in U.S. consumer retail portfolios.

These results provide direct evidence of value in systematically incorporating analyst expectations of industry-specific metrics into quantitative factor models. In addition, we find that margin expansions can have a higher impact on stock returns than comparable sales growth, providing valuable insight for fundamental investors.

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