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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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Key Findings:

Two popular metrics for retailers and restaurants, comparable sales and operating margin growth, generate significant long/short spreads in U.S. consumer retail portfolios.
A long/short strategy taking positions only in what analysts believe to have better- or worse-than-median comparable sales and operating margin growth together has yielded 1.45% monthly alpha since 2017 for retail stocks.
At the stock level, margin expansions are more impactful on stock returns. On average, 100 basis points higher margin improvement gets 0.7% higher stock return in the next 12 months. In contrast, a firm with 100 basis points higher comparable sales growth gets an estimated 0.34% higher stock return in the next 12 months.
Although comparable sales expectations came in line with pre-Covid-19 norms by no later than Fall 2022, the operating margin expectations took longer to converge.

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*The full codebase for this analysis is available via Visible Alpha Insights. Clients can access the codebase here. For all others, please contact our sales team.

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