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An Update Post for Year End
While my typical investments often fail to meet the strict, strong buy ratings, I attempted to see if there were some highly rated tickers that I agreed with. As a result, I previously found five holdings that were both strong buys and that I found were worthy of the title: Alphabet (GOOG), Taiwan Semi (TSM), Catalent (CTLT), Kirin Holdings (OTCPK:KNBWY), and California Resources (CRC). This article will revisit these picks to see whether the strong buy rating performed as intended.
Afterwards, I will provide a quick summary of two recent pieces of scholarly literature that I found interesting about Seeking Alpha, and the effects of the wide-ranging contributions. It seems that we as a platform are contributing to a more transparent market, and there is a potential for higher returns. More on that later. First, let’s go over the algorithm-driven quant rated companies.
Alphabet
Over the past six months Alphabet has fallen by 21% while SPY (SPY) is up 1.2% and QQQ (QQQ) is down 30%. Therefore, amongst their group of peers in tech, Alphabet is doing well, while other sectors of the market outperform temporarily. However, for most investors, an appreciation of the long-term opportunity rather than short-term volatility is crucial.
Despite weaknesses in advertising and investor sentiment, Alphabet retains their moat across multiple key industries (video, search, ads) implying that upon a return to normalcy the shares will improve once again. I find that Alphabet is the best positioned of Big Tech for investors to merely add on a recurring basis and let the company innovate, perform well, and continue to dominate.
Taiwan Semi
TSM has done well despite industry weakness, poor sentiment with geopolitics, and the need to invest in non-Taiwan production. Down 13% over the past six months, TSM has held up well despite the noise. And noise is all it is. As such, I continue to believe that TSM is well suited as a non-US diversification investment for a wide range of investors.
Due to inherent semi industry cyclicality that is hard to predict, I would recommend adding on a rigid recurring basis as timing volatility is difficult. If you still find TSM too risky, perhaps it is best to stick to an industry ETF such as the VanEck Semiconductor ETF (SMH) that holds TSM at a 11% weight.
Catalent
The worst performer of the group, Catalent suffered a 60% sell-off over the past six months as growth fell, FDA site reviews caused uncertainty, and sentiment shifted. The mix of non-financial adverse events culminated in the company falling from a strong buy to a strong sell quant rating in just a few months. This highlights that investments are always risky and outside influences cannot always be detected in historical financial performance.
However, I apologize for this turn of events after my recommendation. While I am still a fan of the CDMO industry, and many of the company issues are temporary, there are other higher quality investments in the industry. Please refer to my article on Evotec (EVO) for a deeper look.
Kirin Holdings
As investors pile into essential industries as the bear market continues, Kirin has been able to perform well. The company has only fallen 1.5% over the past six months, and performance is improving thanks to a wide range of factors. Perhaps most importantly are the forex benefits that non-US companies have been influenced by over the past year.
This includes investors being able to buy the company at over a 20% discount, and non-Japanese sales increasing top and bottom-line growth. The Yen is now reverting thanks to shifting Japanese policies and the end of inflation in the US. Therefore, I believe the bottom is in and Kirin continues to offer a momentum play over the coming years.
California Resources
CRC is an interesting member of the Oil and Gas industry that has risen 7.6% over the past six months, but returns remain less than peers. This is due to operating in gaze-averted California and the investments in carbon capture technologies. However, those two key traits will allow the company to likely outperform peers if demand shifts over the coming quarters.
First, energy prices are less volatile and perpetually high in California, and carbon capture developments will be fruitful in the future. I believe that CRC is worth further consideration for those who want energy exposure that may trade differently than the rest of the industry. I suggest a long-term accumulation strategy through the next energy bear market until linear growth kicks in with the carbon capture
Conclusion
A small pool of five holdings is enough to support concrete conclusions, but I would say the quant system was fairly accurate with these picks over the past six months. While unforeseen events often cannot be predicted, the quant is great for keeping an eye on momentum and relative performance. I will be continuing to check my own bullish investments against the quant rating to see if I am missing or fully appreciating key indicators and relative performance.
Unfortunately, there are just not enough accurate strong buys to support using the quant system solely. Therefore, I will continue to rely on analysis beyond the quant. This is increasingly true for cyclicals or high growth names that typically reflect poor scores due to overvaluation and temporary profit issues. I hope this quick experiment proved useful and please feel free to comment if you would like to see another list created. The quant has been a little volatile over the past few months so strong buys change frequently, so I am not sure the value is high at the moment.
Literature Update
I was recently perusing Google Scholar and found two interesting and informative papers pertaining to the power of Seeking Alpha contributor analysis. Of key concern is the accuracy of the cumulative investment theses on the site, and the platform’s influence on the markets. This allows contributors to realize value not just from the quant data, but from contributor posts as well.
As discussed in The Democratization of Investment Research and the Informativeness of Retail Investor Trading by Farrell, et al. (1):
The Seeking Alpha platform, which curates crowdsourced investment research from nonprofessional analysts, offers several features that make it a natural setting to examine this question. First of all, Seeking Alpha [SA] provides broader access to in-depth investment analysis than most other social media platforms. Consistent with this view, SA research reports and the comments they engender have been shown to predict future stock returns and earnings surprises (Chen et al., 2014).
However, an issue that also arises is that due to contributor’s accuracy, there are noticeable increases in trading post-release and this increased financial transparency causes future changes in performance to be priced in beforehand.
In fact, there is also data that suggests that investors using SA reports and trade after release have an advantage over uninformed investors. It is also important to note SA contributors are more accurate and credible than other social media platforms due to the transparency and financial incentivisation to be accurate.
In Social media, financial reporting opacity, and return comovement: Evidence from Seeking Alpha, Ding, et al. (2) state:
It is likely, therefore, that the information in a Seeking Alpha article is of high quality, because the author has a financial incentive to publish articles with high credibility. If the information in an article is proved to be misleading, the reputation of the author will be negatively affected, and any future article from that author is unlikely to be published by Seeking Alpha. Similar incentives are absent in both Twitter and Facebook, which implies that Seeking Alpha constitutes a powerful setting to test our model.
To the point, both articles find that retail investors can both learn from, and benefit from research posted on Seeking Alpha. Ding, et al even suggest that it may be possible to create algorithms that take advantage of the data, but that is yet to be seen publicly.
Additional caveats include the risk associated with inaccurate or fraudulent posters on SA, but these effects are reduced due to editorial review and financial motivation. The papers go into far more detail than I could ever cover or discuss, so take a look.
Therefore, there is plenty of value to be found on the website, whether the raw fundamental data, quant algorithms and scoring, or contributor theses. I personally will continue to bring what I can to the table and lay out my top investment ideas. Perhaps I will use my site peers for guidance in further articles.
Thanks for reading.
1: Farrell, M., Green, T.C., Jame, R. and Markov, S., 2022. The democratization of investment research and the informativeness of retail investor trading. Journal of Financial Economics, 145(2), pp.616-641.
2: Ding, R., Zhou, H. and Li, Y., 2020. Social media, financial reporting opacity, and return comovement: Evidence from Seeking Alpha. Journal of Financial Markets, 50, p.100511.
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