Can analyst forecasts of industry-specific metrics generate alpha in a cross-section of returns in that industry?
Before the majority of restaurants and retailers announce earnings, join Visible Alpha’s head data scientist in a 45-minute webinar to discuss findings from a recent analysis:
- 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.
Not only will systematic investors learn about the evidence our data science team uncovered that demonstrates the value of incorporating analyst expectations of industry-specific metrics into quantitative factor models, but fundamental investors will gain insight into expectations for stocks based on margin improvements and comparable sales growth.
For example, expectations for operating metrics are varied across industries. Analysts are bullish on fast food chains (McDonald’s, Chipotle), discount retailers (Dollar Tree, Dollar General), and some large diversified retailers (Costco, Walmart) and they are bearish on stocks such as Target, Autonation, and Bed Bath & Beyond.