March 16, 2017
Quantamentals: The Quality Factor Equity Research
Time to Step into Integrated Consistent Outperformance … but not 2016
Jessica Binder Graham, CFA
Our Integrated (aka Quality) Factor – a composite of Growth, Returns and Value – has delivered the best risk adjusted returns vs. our broader factor suite over the last decade. This has been driven by strong performance as well as lower volatility. Furthermore, we see a compelling entry point as Integrated now trades at one of the most attractive valuation levels vs. the past five years. See inside for the stocks currently in the top / bottom quintile relative to their sectors.
(212) 902-7693
[email protected] Goldman, Sachs & Co.
Ronny Scardino (212) 357-3775
[email protected] Goldman, Sachs & Co.
Deep Mehta
Valuation Disconnect: Quality on Sale? Our long-short Integrated factor is trading 2.1 standard deviations below its historical average, the largest disconnects of any of the factors that we track and near the largest discounts compared to the past five years. Drilling down into the tails, we find stocks with low scores (the short leg of the trade) is trading at a largest premium vs. history (21.5%) while stocks with high scores (long leg) are at a more modest premium (5.5%).
(212) 357-8419
[email protected] Goldman, Sachs & Co.
Ujjwal Kumar (646) 446-8697
[email protected] Goldman Sachs India SPL
HOW INTEGRATED IS CALCULATED
Factor Diversification: The Academic View Academic literature supports that combining multiple factors can improve risk-adjusted returns. In addition, there are benefits of implementing on an individual security level vs. aggregating individual factor portfolios. We find Integrated has better performance and risk-adjusted returns than a simple average of its constituent pieces (Growth, Value, Returns). Integrated has had the best risk-adjusted performance across our factors
Information Ratio
1.6
1.5
Growth, Valuation and Returns are based on the following: • Growth: an average of sales, EBITDA and EPS growth (Financials: only sales and EPS growth are included).
• Returns: an average of a company’s Return on Equity (ROE), Return on Capital Employed (ROCE) and Cash Return on Cash Invested (Financials: only ROE is included).
1.0
1.0 0.3
0.5
Integrated is a composite metric that is a simple average of Growth, Returns and Value scores. We bucket companies into the highest quintile (Q1 or top 20%) and lowest quintile (Q5/lowest 20%) within each coverage sector.
• Valuation: an average of P/E, P/B, dividend yield, EV/FCF, EV/EBITDA and EV/DACF (Financials: only P/E, P/B and dividend yield are included).
all metrics since Inception (Sept 2006-March 2017) 2.0
The Goldman Sachs Investment Profile (IP) provides investment context for a security and leverages our analysts’ forward-looking estimates.
0.2
For further details on methodology see page 10. 0.1
0.0 -0.5 Integrated (High vs Low)
Valuation (Cheap vs Rich)
Growth (High vs Low)
Balance Sheet (Strong vs Weak)
Returns (High vs Low)
-0.3 Volatility (Low vs High)
-0.4 Size (Large vs Small)
Perf (Annual.)
8%
6%
2%
1%
1%
-5%
-4%
Vol (Annual.)
5%
6%
6%
7%
9%
16%
11%
Source: Goldman Sachs Global Investment Research.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
Global Investment Research
March 16, 2017
Quantamentals: The Quality Factor
The Quality Factor
Our analysis of quantitative and fundamental strategies from a factor, technical and style perspective. Visit our portal to explore the full series. Factor Review and Outlook: The Value Trade, Momentum & Crowding, Jan 4, 2017 Quantamental Theory: The Seasons & Reasons of Factor Performance, July 13, 2016 Quantamental 101- Factor Investing: The Rise of the Machines II, March 14, 2016
The Integrated (aka Quality) Factor, which is a composite of Growth, Returns and Value, has delivered the best cumulative performance across our GS Investment Profile (IP) factor suite since 2006 with significantly lower volatility. We see an attractive entry point for investors seeking quality, as the factor now trades at one of the most attractive valuation levels vs. the past five years. It’s been over a year since Factormageddon1 galvanized fundamental investors to increase their factor awareness. Since that time, it is clear that many have expanded their sophistication when it comes to monitoring factors as well as using factors for risk management purposes and/or taking tactical view. As investors continue to expand their toolbox we highlight our Integrated Strategy as a proxy for “quality,” given it strong performance track record at lower volatility. As a reminder, we take a simple average of three dimensions: Valuation, Growth and Returns. In our view, it is the diversification benefit of this multi-factor approach that contributes to this attractive risk profile.
Consistent Performance at the Lowest Volatility. Integrated has delivered the strongest performance since inception and has posted positive returns in 9 of the last 10 years. It has also exhibited the lowest annualized volatility. Consequently, it has the best Information Ratio (IR) across our factor suite (Exhibit 1). On a rolling 12M basis, it has shown a positive Information Ratio over 98% of the time and a level above 1 just over 50% of the time.
ETFs: The Rise of the Machines, April 10, 2015
1
See Quantamental 101- Factor Investing: The Rise of the Machines II, March 14, 2016.
Exhibit 1: Consistent Performance + Low Volatility = Best Risk Adjusted Alpha Information Ratio, Performance (Total Return) and Volatility (Standard Deviation) for GS Investment Profile (IP) Factors Since Inception (Sept '06)*
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1.4 2.7 2.5 -1.5 -1.6 -1.9 -1.8
0.7 0.3 1.7 -1.1 1.9 -1.7 -1.2
1.1 0.1 -0.7 0.7 0.8 0.0 0.5
0.8 0.6 0.4 -0.6 -1.2 -1.0 -0.6
0.0 1.4 0.0 -0.7 -0.7 -1.4 -1.0
2.7 2.4 -0.9 1.6 0.5 1.8 1.0
1.8 0.7 0.3 2.2 1.9 1.5 1.7
0.1 1.6 0.1 -1.3 -0.9 -1.4 -0.9
4% 0% -4% 5% 4% 0% 8%
Information Ratio Integrated (High vs Low) Valuation (Cheap vs Rich) Growth (High vs Low) Returns (High vs Low) Balance Sheet (Strong vs Weak) Size (Large vs Small) Volatility (Low vs High)
Shading denotes Information Ratio >1 1.6 3.1 0.4 1.0 -1.2 0.4 0.3 1.7 -1.9 0.1 3.6 0.7 0.2 3.0 1.0 -0.4 1.9 0.3 -0.3 0.1 0.8
Performance (Total Return) Integrated (High vs Low) Valuation (Cheap vs Rich) Growth (High vs Low) Returns (High vs Low) Balance Sheet (Strong vs Weak) Size (Large vs Small) Volatility (Low vs High)
Shading denotes best and worst performing fundamental factor 8% 12% 4% 9% 3% 6% -7% 4% 21% 1% 2% 9% -15% 19% 8% 1% 17% 10% -22% -7% 1% 12% 13% -20% 7% -4% 13% 4% -33% -15% -5% 0% 20% -50% -16%
4% 3% 2% -3% -5% -7% -7%
0% 6% 0% -3% -3% -8% -7%
11% 14% -6% 8% 2% 15% 10%
8% 3% 1% 16% 12% 14% 18%
1% 9% 1% -14% -8% -21% -18%
Volatility (Standard Deviation) Integrated (High vs Low) Valuation (Cheap vs Rich) Growth (High vs Low) Returns (High vs Low) Balance Sheet (Strong vs Weak) Size (Large vs Small) Volatility (Low vs High)
Shading denotes fundamental factor with the lowest/highest vol in any given year 5% 4% 9% 7% 4% 4% 5% 6% 6% 11% 8% 5% 6% 6% 6% 5% 8% 8% 5% 5% 6% 9% 5% 14% 15% 6% 7% 6% 7% 4% 13% 12% 4% 4% 4% 11% 7% 15% 17% 9% 11% 7% 16% 7% 27% 27% 13% 16% 10%
3% 4% 4% 4% 4% 6% 7%
4% 6% 6% 5% 4% 8% 10%
4% 5% 4% 7% 6% 10% 11%
5% 5% 6% 11% 9% 16% 20%
Note: (1) * since inception has been annualized and is through March 14, 2017, (2) All performance figures are based on our proprietary Investment Profile framework, which ranks and normalizes our analyst estimates into specific style buckets. Companies are grouped into highest quintile (Q1 or top 20%) as Buys and lowest quintiles (Q5 or bottom 20%) as Sells in each coverage sector and performance is equal-weighted. The performance of the combined market neutral strategies will not necessarily equal the difference between their two component tails because of the effects of rebalancing. The combined strategies are reweighted on a weekly basis to maintain a market-neutral position. (3) We calculate perf and std deviation on an annualized basis, with the latter based on daily total returns over a trailing 12-m period, (4) In the case of our market-neutral factor model, the short leg acts as the benchmark when calculating the IR.
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
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March 16, 2017
Quantamentals: The Quality Factor
Digging into 2016 Performance Aside from Value, few factors generated positive alpha in 2016 and factor volatility was elevated for a good part of the year. This resulted in low/negative information ratios for most factors we track. Integrated did finish in positive territory (+1%) though performance paled vs. recent history (11% and 8% in 2014 and 2015, respectively) and was the second worst year in the last decade. We highlight the following explanations:
While Integrated is an equally weighted average of Growth, Value and Returns metrics, we find that over time it has been consistently the most correlated with Returns (as Growth / Value scores tend to provide opposite signals). In addition, there is outsized overlap between the two. See Exhibit 2 and 3. Given the dramatic pullback in Returns in 2016 (down 14% for the year), it is perhaps unsurprising Integrated did not fare that well.
From a sector perceptive, Industrials, Health Care and Financials detracted from the headline performance. See Exhibit 4. We note that in years when Integrated fares well, it tends to be consistent across the majority of sectors (78% in 2011, 2012 and 2014; 56% in 2015). See Exhibit 5.
Exhibit 2: Performance has been most correlated w/ Returns
Exhibit 3: and there is significant overlap between names
3m rolling correlation based on daily price changes
% of names also in Q1/Q5 Growth, Returns, Value 65%
80%
60%
Factor Constituent Overlap (%)
100%
3 month Correlation
60% 40% 20% 0% -20% -40%
Integrated Correl with Growth Integrated Correl with Returns Integrated Correl with Valuation
-60%
55% 50% 45% 40% 35% 30% 25%
-80%
Integrated & Growth (Q1) Integrated & Valuation (Q1) Integrated & Returns (Q1)
Integrated & Growth (Q5) Integrated & Valuation (Q5) Integrated & Returns (Q5)
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research. As of 3/13/2017.
Exhibit 4: Energy and Industrials drove 2016 performance
Exhibit 5: Integrated Performance by GICS sector
2016 attribution weighted by GICS Sector; sorted by Q1 vs. Q5
Sorted by 2016
7% 6%
High Integrated outperformed Low
GICS Sector
Low Integrated outperformed High
5% 4% 3% 2% 1% 0% -1% Energy Cons Disc Materials Info Tech Q1 Integrated (High Scores)
Cons Staples
Utilities Financials
Health Care
Industrials
Q5 Integrated (Low Scores)
2011*
2012
2013
2014
2015
Materials
11%
9%
2%
0%
1%
2016 30%
Energy
9%
37%
8%
34%
21%
18%
Cons Disc.
0%
-15%
6%
9%
-7%
6%
Info Tech
9%
7%
-3%
19%
13%
0%
Cons Staples
1%
27%
-29%
0%
-7%
-1%
Financials
1%
4%
-1%
-3%
-3%
-5% -12%
Utilities
-10%
5%
-4%
2%
-8%
Industrials
-11%
-3%
7%
14%
18%
-14%
Health Care
8%
9%
-7%
8%
12%
-16%
# of Sectors with + Alpha
78%
78%
44%
78%
56%
33%
Note: Telecom and Real Estate have been excluded given small sector size (by number of names) and limited history, respectively.
Note: * 2011 begins on March 28, 2011.
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
Note: because our factor model is based on GS-defined conviction sectors and not GICS, the number of companies in each GICS sector will vary by quintile whereas there are equal numbers in Q1/Q5 in our model. Therefore, GICS level attribution will not add up to overall factor performance. Nonetheless, we find the GICS level aggregation a useful tool in giving investors a sense as to what sectors are driving overall factor performance.
Goldman Sachs Global Investment Research
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March 16, 2017
Quantamentals: The Quality Factor
Quality on Sale? In our view, factor valuation is a useful gauge of investor sentiment and crowdedness. See Factor Review and Outlook, The Value Trade, Momentum and Crowding, Jan 4, 2017 for more details. With the market trading at near all-time highs, it is not surprising that most factor tails (the individual Q1s and Q5s) are trading above their historical averages. However, what is notable is that (1) High Integrated is one of the least expensive factors (trading at just a 5.5% premium to its 5yr median) while Low Integrated is one of the most expensive (21.5% premium) when compared against other factors and (2) as a result, the ratio between the two is at one of the lowest points over the last five years and is the biggest disconnects of any of the market-neutral factors that we track. See Exhibit 6-7.
Exhibit 6: Integrated is near the cheapest levels since 2012
Exhibit 7: … and is more than 2 std deviations below average
Ratio of Forward P/E (Q1 / Q5)
Long / Short Factor Valuation
1.0
Forward P/E (Long/ Short Ratio)
Ratio of Q1/Q5 Forward P/E
Factor 0.9
0.8
0.7
0.6 2012
2013
2014
2015
2016
2017
Integrated Valuation
Source: I/B/E/S, Goldman Sachs Global Investment Research.
5yr Avg.
Current # of St Dev vs 5yr Above/ Avg. Below Avg.
Valuation (Cheapest vs. Richest)
0.6
0.5
16%
2.1
Volatility (Low vs. High)
1.2
0.9
23%
1.9
Size (Large vs. Small)
1.0
0.9
12%
1.4
Short Interest (Low vs. High)
0.9
0.9
9%
1.0
Growth (High vs. Low)
1.6
1.5
1%
0.1
Balance Sheet (Strong vs. Weak)
1.1
1.1
0%
0.0
Returns (High vs. Low)
0.8
0.9
-9%
-1.1
Momentum (Leaders vs. Laggards)
1.0
1.2
-16%
-1.3
Integrated (High vs. Low)
0.7
0.8
-14%
-2.1
Source: I/B/E/S, Goldman Sachs Global Investment Research
Exhibit 8: Integrated Q5 (low scores) is trading at a large valuation premium vs. history. The Q1 premium is more modest Forward P/E Valuation Factors, sorted by difference between current and 5yr median P/E 5-year Median
5-year Range
10
Forward P/E 15 20 25
30
35
Current
Least Expensive vs. History High Volatility
Performance Leaders (6m)
High ROCE
Rich EV/EBITDA
High Integrated
Small Size
Low CROCI
Rich P/B
High ROE
Rich EV/DACF
High Returns
Rich Valuation
High EBITDA Growth
Rich P/E
Weak Balance Sheets
Low EPS Growth
High Short Interest
High Dividend Yield
Strong Balance Sheets
Cheap P/E
Low Dividend Yield
Low Growth
Low EBITDA Growth
Cheap P/B
Low Sales Growth
Low ROCE
High Sales Growth
High CROCI
Large Size
Cheap EV/EBITDA
High EPS Growth
High Growth
Low Returns
Cheap EV/FCF
Low ROE
Rich EV/FCF
Low Integrated
Low Short Interest
Low Volatility
Performance Laggards (6m)
Cheap Valuation
Cheap EV/DACF
5
Expensive vs. History
Source: I/B/E/S, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
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March 16, 2017
Quantamentals: The Quality Factor
Case Study: Integrated During Factormaggedon Factor Volatility and Market Drawdowns: Weathering the Storm While Integrated performance was muted in 2016, it did continue to post below-average volatility. As a case study we turn to the most recent episode of significant factor rotation in early 2016 (e.g. “Factormageddon”). The 2 week period starting February 23, 2016 saw a 5+ standard deviation move1 for a number of our factors. However, over this time frame, Integrated moved less than 1 standard deviation. One of the reasons for this is the Value input limits the potential to “overpay” for one of the other two metrics and therefore is less at risk for a reversal. In addition, we find Integrated tends to have less macro sensitivity than many of the other factors that we track. Below we revisit the interplay between our IP factors and macro variables (e.g. US/European/China Growth, US/Euro FCI, Oil Price and Inflation Expectations) and find that only about 5% of Integrated performance can be explained by changes in the macro. For more details see Quantamental Theory: Seasons and Reasons, July 13, 2016.
Exhibit 10: Integrated has the least macro sensitivity among factors
# of std deviations based on 2 week performance as of 3/8/16 vs. past 5 yrs; factor performance over 2 weeks ending 3/8/16
% of performance explained by changes in macro variables
15%
Factor Performance (%)
10%
P/B
5% Valuation
0%
EV/DACF
Integrated Growth
-5%
P/E
Short Interest Returns
Sales Growth
Leverage
-10%
CROCI ROE
ROCE
-15%
Momentum
Factor vs Macro Variable R-squared
Exhibit 9: Factor performance and volatility during “Factormageddon”
60% 50% 40%
At least 35% of our technical factor perf can be explained by macro variables...
30% 20%
...which compares to just 5% for our Integrated Strategy
10% 0%
Volatility -20% 0 sd
1 sd
2 sd
3 sd
4 sd
5 sd
6 sd
7 sd
8 sd
9 sd
# of Standard Deviations
Source: Goldman Sachs Global Investment Research.
1
Source: Goldman Sachs Global Investment Research.
Note this assumes a normal distribution, which is unlikely a realistic assumption for equity prices.
Goldman Sachs Global Investment Research
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March 16, 2017
Quantamentals: The Quality Factor
A Multi-Factor Approach vs. Factor Diversification
There are numerous academic papers espousing the benefits of factor diversification which typically drive improved risk-adjusted returns. Much of this benefit stems from the fact that correlations between factors are less than one, and in some cases, such as Momentum and Value, are negative2. However, recent industry debate has been around whether a diversified factor approach is best implemented by combining individual factor portfolios or by combining factors at the single-security level (similar to our Integrated factor discussed in this report) which has been shown to generate stronger performance with lower volatility than combining multiple factor strategies.3,4 By comparing Integrated to a simple weighted average of its three constituent factors (Returns, Growth and Value), we find that the multi-factor approach produces significantly stronger returns since inception (84% vs. 31%) and consistently outperforms in all but one year (2013). In addition, Integrated produces a better risk-adjusted return (as gauged by the information ratio) despite the average of Growth, Value and Returns showing lower volatility. This is due to the dampening effect of the consistently negative correlation between Value and Growth (see Exhibit 12). Exhibit 11: Integrated has outperformed Fundamental Factors by 53% since inception in 2006…
Exhibit 12: …and has had stronger performance and risk-adjusted returns despite slightly higher volatility
Performance of Fundamental Factors vs Integrated Factor
Annual. Information Ratio, Perf & Vol Since Inception
Performance (Index: Sept 2006)
1.9 +84%
1.8
10% 9%
1.7
Integrated
1.8
Growth, Value, Returns Avg
1.6
8%
1.6
1.4
7%
1.5
1.2
6%
1.4
1.0
5% +31%
1.3 1.2
0.8
4%
0.6
3%
1.1 1.0
2%
0.4
1%
0.2
0% Fundamental Factors (Avg of Returns, Growth, Value) Integrated Factor
Source: Goldman Sachs Global Investment Research.
0.0 Perf (Ann.)
Volatility (Ann.)
Information Ratio (RHS)
Source: Goldman Sachs Global Investment Research.
2
Asness, C.S., Moskowitz, T.J. and Pedersen, L.H. (2013), Value and Momentum Everywhere. The Journal of Finance, 68: 929–985. DOI:10.1111/jofi.12021. https://eorder.sheridan.com/3_0/app/orders/4482/files/assets/basichtml/page-929.html# 3
Bender, Jennifer and Wang, Taie, Can the Whole Be More Than the Sum of the Parts? Bottom-Up versus TopDown Multifactor Portfolio Construction. The Journal of Portfolio Management, Vol 42, No. 5 (May 2016).
4
Clarke, Roger G and de Silva, Harindra and Thorley, Steven, Fundamentals of Efficient Factor Investing (October 11, 2016). Financial Analysts Journal, Vol. 72, No. 6 (2016). http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n6.3
Goldman Sachs Global Investment Research
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March 16, 2017
Quantamentals: The Quality Factor
Integrated Factor Constituents Below we highlight the Q1 and Q5 constituents as of March 14, 2017. Exhibit 13: Companies in the Top Quintile (Q1) Ticker
Company Name
Rating
Ticker
Company Name
Rating
Ticker
Company Name
Rating
A AAPL ABBV ACIA ACN ACOR ADS ALDW AMCX APLP APO AR ARES ARRS AVGO BG BIIB BIVV BKU BX CAR CBG CBI CC CCL CCOI CCP CE CG CL CLH CMCSA CNK COLM COTV CPN CPS CQH CQP CRTO CRZO CSTM CTSH CVRR CYBR DF DFS DGC.TO DGX DISCA DKS DNB DYN EAT EBAY EL EVA EXP FCX
Agilent Technologies Inc. Apple Inc. AbbVie Inc. Acacia Communications Inc. Accenture Plc Acorda Therapeutics Inc. Alliance Data Systems Corp. Alon USA Partners AMC Networks Inc. Archrock Partners Apollo Global Management LLC Antero Resources Corp. Ares Management LP ARRIS International Plc Broadcom Ltd. Bunge Biogen Inc. Bioverativ Inc. BankUnited Inc. Blackstone Group Avis Budget Group CBRE Group Chicago Bridge & Iron Chemours Carnival Corp. Cogent Communications Holdings Care Capital Properties Inc. Celanese Corp. Carlyle Group Colgate-Palmolive Co. Clean Harbors Inc. Comcast Corp. Cinemark Holdings Columbia Sportswear Co. Cotiviti Holdings Calpine Corp. Cooper-Standard Holdings Cheniere Energy Partners Holdings Cheniere Energy Partners Criteo SA Carrizo Oil & Gas Inc. Constellium Cognizant Technology Solutions CVR Refining LP CyberArk Dean Foods Co. Discover Financial Services Detour Gold Corp. Quest Diagnostics Inc. Discovery Communications Inc. Dick's Sporting Goods Dun & Bradstreet Corp. Dynegy Inc. Brinker International eBay Inc. Estee Lauder Co. Enviva Partners LP Eagle Materials Inc. Freeport-McMoRan Inc.
Buy* Buy Buy* Neutral Neutral Neutral Neutral Neutral Buy Buy Buy Neutral Neutral Buy Buy Buy Neutral Neutral Sell Buy Neutral Buy Neutral Buy Neutral Neutral Neutral Buy Neutral Neutral Neutral Buy Buy* Buy* Neutral Buy Buy Neutral Neutral Buy Neutral Neutral Neutral Neutral Neutral Neutral Buy Buy Buy* Sell Buy Neutral Neutral Neutral Buy Neutral Neutral Neutral Neutral
FDS FFIV FLEX FLIR FLR FMSA FNSR FTI GILD GLBL GOOGL GPK GPOR GT GWPH HAL HD HEP HF HP HRS ICLR INCR INCY INTU IP IPG ITT JAG JCI JELD JLL JNJ JNPR KAR KATE KMB KMT KORS LB LH LLY LOW LPLA LRCX LYB MAR MAS MCK MMI MNST MPC MPLX MPW MS MSFT MTCH MWA NBR
FactSet Research Systems Inc. F5 Networks Inc. Flex FLIR Systems Inc. Fluor Corp. Fairmount Santrol Holdings Finisar Corp. TechnipFMC Plc Gilead Sciences Inc. TerraForm Global Inc. Alphabet Inc. Graphic Packaging Holding Gulfport Energy Corp. Goodyear Tire & Rubber Co. GW Pharmaceuticals Plc Halliburton Co. Home Depot Inc. Holly Energy Partners HFF Inc. Helmerich & Payne Inc. Harris Corp. ICON Plc INC Research Holdings Incyte Corp. Intuit Inc. International Paper Co. Interpublic Group of Co. ITT Inc. Jagged Peak Energy Inc. Johnson Controls International Plc JELD-WEN Holding Jones Lang LaSalle Inc. Johnson & Johnson Juniper Networks Inc. KAR Auction Services Inc. Kate Spade & Co. Kimberly-Clark Corp. Kennametal Inc. Michael Kors Holdings L Brands Inc. Laboratory Corp. of America Holdings Eli Lilly & Co. Lowe's Cos. LPL Financial Holdings Lam Research Corp. LyondellBasell Industries Marriott International Masco Corp. McKesson Corp. Marcus & Millichap Inc. Monster Beverage Corp. Marathon Petroleum Corp. MPLX LP Medical Properties Trust Inc. Morgan Stanley & Co. Microsoft Corp. Match Group Mueller Water Products Inc. Nabors Industries Ltd.
Sell Neutral Buy Buy Neutral Neutral Buy Buy Neutral Neutral Buy* Buy Buy Buy Buy Buy Neutral Neutral Neutral Neutral Buy Buy Buy Buy Buy* Neutral Neutral Buy Buy Neutral Neutral Buy Neutral Buy* Neutral Neutral Buy Buy Neutral Buy Neutral Buy* Buy Neutral Buy* Neutral Buy* Buy Neutral Neutral Buy* Buy Buy Neutral Neutral Buy Sell Buy Buy*
NEP NFX NICE NOC NOW NYLD__A OHI ON ORCL OXY PBPB PCAR PCLN PM PMTS POR PRTY PRXL PSXP PYPL QSR.TO RCL REVG RLGY ROK ROST SABR SAFM SBUX SEE SF SGRY SIRI SMLP SPR SPWH STE STOR STX SWK SWKS SWN SYF TCP TMUS TSE TXRH UAN ULTA ULTI V VEEV VIRT VLO VVV WHR WSM WYN YRI.TO
NextEra Energy Partners Newfield Exploration Co. NICE Ltd. Northrop Grumman Corp. ServiceNow Inc. NRG Yield Inc. Omega Healthcare Investors Inc. ON Semiconductor Corp. Oracle Corp. Occidental Petroleum Corp. Potbelly Corp. Paccar Inc. Priceline.com Inc. Philip Morris International Inc. CPI Card Group Portland General Electric Co. Party City Holdco Inc. Parexel International Corp. Phillips 66 Partners PayPal Holdings Restaurant Brands Intl Inc. Royal Caribbean Cruises Ltd. REV Group Realogy Holdings Rockwell Automation Inc. Ross Stores Inc. Sabre Corp. Sanderson Farms Inc. Starbucks Corp. Sealed Air Corp. Stifel Financial Corp. Surgery Partners Inc. Sirius XM Holdings Summit Midstream Partners Spirit AeroSystems Holdings Sportsman's Warehouse Holdings Steris Plc STORE Capital Seagate Technology Stanley Black & Decker Inc. Skyworks Solutions Inc. Southwestern Energy Co. Synchrony Financial TC PipeLines LP T-Mobile US Inc. Trinseo SA Texas Roadhouse Inc. CVR Partners Ulta Beauty Inc. Ultimate Software Group Visa Inc. Veeva Systems Inc. Virtu Financial Inc. Valero Energy Corp. Valvoline Inc. Whirlpool Corp. Williams-Sonoma Inc. Wyndham Worldwide Corp. Yamana Gold Inc.
Buy Neutral Neutral Buy* Neutral Buy Neutral Buy Buy* Neutral Neutral Neutral Neutral Buy Neutral Sell Neutral Sell Sell Buy* Neutral Sell Neutral Neutral Neutral Neutral Buy Sell Buy* Buy* Buy Neutral Neutral Neutral Sell Buy Neutral Buy* Neutral Neutral Neutral Neutral Buy* Neutral Buy Neutral Neutral Neutral Neutral Neutral Buy* Neutral Buy Buy Neutral Neutral Buy Neutral Sell
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
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March 16, 2017
Quantamentals: The Quality Factor
Exhibit 14: Companies in the Bottom Quintile (Q5) Ticker
Company Name
Rating
Ticker
Company Name
Rating
Ticker
Company Name
Rating
AB ACC ADI ADM ADSK ADTN AEM.TO AIV ALB AMC AN APH APTI ARNC ASNA ATO AWK BBD__B.TO BBRY BBT BEN BMS BNFT BPMC BURL CCI CEQP CFX CLMT CLVS CME CRC CREE CSLT CVE DDR DHR DISH DK DMTX DNKN DNR DO DVA DVN ECL EIGI EPC EQGP EQR EQT ERJ ES ESV ETE ETN EVER EVH FEYE
AllianceBernstein Holding American Campus Communities Inc. Analog Devices Inc. Archer-Daniels-Midland Autodesk Inc. ADTRAN Inc. Agnico Eagle Mines Ltd. Apartment Investment & Management Albemarle Corp. AMC Entertainment Holdings AutoNation Inc. Amphenol Corp. Apptio Inc. Arconic Inc. Ascena Retail Group Atmos Energy Corp. American Water Works Bombardier Inc. BlackBerry Ltd. BB&T Corp. Franklin Resources Inc. Bemis Co. Benefitfocus Inc. Blueprint Medicines Corp. Burlington Stores Inc. Crown Castle International Corp. Crestwood Equity Partners Colfax Corp. Calumet Specialty Products Partners Clovis Oncology Inc. CME Group California Resources Corp. Cree Inc. Castlight Health Inc. Cenovus Energy Inc. DDR Corp. Danaher Corp. DISH Network Corp. Delek US Holdings Dimension Therapeutics Dunkin' Brands Group Denbury Resources Inc. Diamond Offshore Drilling DaVita Inc. Devon Energy Corp. Ecolab Inc. Endurance International Group Edgewell Personal Care EQT GP Holdings Equity Residential EQT Corp. Embraer Eversource Energy Ensco Plc Energy Transfer Equity Eaton Corp. EverBank Financial Corp. Evolent Health Inc. FireEye Inc.
Neutral Sell Neutral Neutral Buy Sell Neutral Neutral Buy* Neutral Neutral Buy Neutral Sell Neutral Neutral Neutral Neutral Sell Neutral Sell Neutral Neutral Buy Buy Buy* Buy Neutral Neutral Neutral Neutral Sell Sell Neutral Sell Neutral Neutral Buy Neutral Neutral Neutral Sell Sell Sell Neutral Sell Sell Neutral Neutral Sell Neutral Buy Neutral Neutral Neutral Neutral Sell Buy* Sell
FHB FIS FLS FMI FNV.TO FSLR FTR GD GGP GHL GNC GNRC GPI GPN GPRO H HIVE HLI HMHC HRI HSE.TO HST HUBS ICE IMAX INFN INGR IONS IRWD JACK JUNO KHC KLAC KMI KO LAMR LC LGF__A LL LQ MAC MCD MCRB MIK MOBL MRVL MTB MTW MUR MYCC NAV NDAQ NE NI ODP P PAGP PF PGRE
First Hawaiian Inc. Fidelity National Information Services Flowserve Corp. Foundation Medicine Inc. Franco-Nevada Corp. First Solar Inc. Frontier Communications Corp. General Dynamics Corp. GGP Inc. Greenhill & Co. GNC Holdings Generac Holdings Group 1 Automotive Inc. Global Payments Inc. GoPro Inc. Hyatt Hotels Corp. Aerohive Networks Inc. Houlihan Lokey Inc. Houghton Mifflin Harcourt Corp. Herc Holdings Husky Energy Inc. Host Hotels & Resorts Inc. HubSpot Inc. IntercontinentalExchange Inc. IMAX Corp. Infinera Corp. Ingredion Inc. Ionis Pharmaceuticals Inc. Ironwood Pharmaceuticals Inc. Jack in the Box Inc. Juno Therapeutics Inc. Kraft Heinz Co. KLA-Tencor Corp. Kinder Morgan Inc. Coca-Cola Co. Lamar Advertising Co. LendingClub Corp. Lions Gate Entertainment Corp. Lumber Liquidators Holdings La Quinta Holdings Macerich Co. McDonald's Corp. Seres Therapeutics Inc. Michaels Cos. MobileIron Inc. Marvell Technology Group M&T Bank Corp. Manitowoc Co. Murphy Oil Corp. ClubCorp Holdings Navistar International Corp. Nasdaq Inc. Noble Corp. NiSource Inc. Office Depot Pandora Media Inc. Plains GP Holdings Pinnacle Foods Inc. Paramount Group
Neutral Buy Neutral Neutral Neutral Neutral Neutral Neutral Neutral Sell Sell Neutral Sell Buy Sell Neutral Neutral Neutral Buy Neutral Buy Sell Neutral Buy* Neutral Neutral Sell Sell Neutral Sell Neutral Buy* Buy Buy Sell Buy Neutral Neutral Sell Sell Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Sell Neutral Neutral Neutral Sell Neutral Neutral Buy* Neutral Buy Neutral
PLD POT PSTG PTLA RAD RDC RIG ROLL ROP RSG RSPP RUN RXN SAM SCWX SJM SLG SQ SRCL SRE SWC TAP TCS TEL TEX TIF TRI TRP.TO TRS TRUE TSLA TTOO TWLO TWOU TXMD TXN UAA UFS UNIT UNVR URBN UTX VSI W WAB WEC WEN WEX WFC WFM WLK WM WMB WSTC XEC XRAY YUM ZEN ZNGA
Prologis Inc. Potash Corp. of Saskatchewan Inc. Pure Storage Inc. Portola Pharmaceuticals Inc. Rite Aid Corp. Rowan Cos. Transocean Ltd. RBC Bearings Inc. Roper Technologies Inc. Republic Services Inc. RSP Permian Inc. Sunrun Inc. Rexnord Corp. Boston Beer Co. SecureWorks Corp. J. M. Smucker Co. SL Green Realty Corp. Square Inc. Stericycle Inc. Sempra Energy Stillwater Mining Co. Molson Coors Brewing Co. Container Store Group TE Connectivity Ltd. Terex Corp. Tiffany & Co. Thomson Reuters Corp. TransCanada Corp. TriMas Corp. TrueCar Tesla Inc. T2 Biosystems Inc. Twilio 2U Inc. TherapeuticsMD Inc. Texas Instruments Inc. Under Armour Inc. Domtar Corp. Uniti Group Inc. Univar Inc. Urban Outfitters Inc. United Technologies Corp. Vitamin Shoppe Inc. Wayfair Inc. Wabtec Corp. WEC Energy Group The Wendy's Co. WEX Inc. Wells Fargo & Co. Whole Foods Market Inc. Westlake Chemical Corp. Waste Management Inc. Williams Cos. West Corp. Cimarex Energy Co. DENTSPLY Sirona Inc. Yum! Brands Inc. Zendesk Inc. Zynga Inc.
Sell Neutral Neutral Neutral Neutral Neutral Sell Neutral Neutral Neutral Neutral Buy Sell Neutral Buy Sell Neutral Buy Neutral Neutral Neutral Buy Neutral Sell Buy Neutral Neutral Buy Neutral Neutral Sell Neutral Neutral Buy Buy Sell Neutral Neutral Neutral Buy Sell Neutral Sell Neutral Neutral Neutral Neutral Neutral Buy Sell Neutral Sell Buy* Sell Buy Neutral Sell Buy Neutral
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
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March 16, 2017
Quantamentals: The Quality Factor
Appendix 1: Other Factor Exposures Given the construct of Integrated, the top(bottom) 20% of companies are naturally skewed towards high(low) growth, high(low) returns and low(high) multiple. Further, the long-short pair tends to be a bias towards low leverage, large companies and lower volatility. Exhibit 15: Factor Exposures for the Integrated Strategy Factor decomposition for Integrated Quintiles 1 and 5 40%
50%
Q1
Growth
Q5
Q1
Multiple
Q5
40%
30%
40%
Q1
Returns
Q5 30%
30% 20%
20% 20%
10%
10%
10%
0%
0% Q1 High Growth
Q2
40%
Q3
Q4
Q5 Low Growth Q1
Balance Sheet
0% Q1 High Returns
Q2
40%
30%
20%
20%
10%
10%
Q4
Q1 Low Multiple
Q5 Low Returns Q1
Size
Q5
30%
Q3
Q2
30%
Q3
Q4
Q1
Volatility
Q5
Q5 High Multiple
Q5
20%
10%
0%
0% Q1 Low Leverage
Q2
Q3
Q4
Q5 High Leverage
0% Q1 Large Size
Q2
Q3
Q4
Q5 Small Size
Q1 Low Vol
Q2
Q3
Q4
Q5 High Vol
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
9
March 16, 2017
Quantamentals: The Quality Factor
Appendix 2: IP Factor Methodology Calculation methodology for the GS Investment Profile (IP) scores:
The Goldman Sachs Investment Profile (IP Scores) is a tool we use to better understand the investment context for a security by comparing key attributes of that security to the market (i.e., our coverage universe) and sector peers. We leverage our in-house analyst models and estimates, which we believe provide a more forward looking/accurate measurement of company expectations/performance.
Returns and Valuation use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters away. Growth uses the value for the fiscal year at least seven quarters away compared with the year at least three quarters away (on a per-share basis for all metrics).
These metrics are normalized by assigning a Z-score based on the company’s position within the overall distribution of all IP scores (assuming a normal distribution). The average of these normalized metrics is taken (or average of the applicable metrics in case of financials) and is then used to generate a percentile score from 1 to 100 for each factor.
We bucket these company scores into highest quintile (Q1 or top 20%) and lowest quintiles (20%) within each coverage sector, and construct portfolios with an equal number of stocks under Q1 and Q5. The performance of these top and bottom quintile tails, as well as a sector-neutral portfolio (Buy Q1, Sell Q5) of the two, is tracked and rebalanced on a weekly basis.
Measures used in each factor:
Integrated: calculated as an aggregate score based on Returns, Growth and Valuation. Q1: stocks with the highest integrated score within their sectors; Q5: stocks with the lowest Integrated score.
Returns: calculated using an average of return on equity (ROE), return on capital employed (ROCE), and cash return on cash invested (CROCI) for each stock. Only ROE is considered for financial stocks. Q1: stocks with the highest 20% returns within their coverage sector; Q5: stocks with the lowest 20% returns.
Growth: calculated using an average of a company’s sales, EBITDA and EPS growth. For financials, we use only EPS and sales growth. Q1: stocks with the highest sector relative growth; Q5: stocks with the lowest growth.
Valuation: calculated using an average of price/earnings, price/book, dividend yield, enterprise value/EBITDA, enterprise value/free cash flow and enterprise value/debt adjusted cash flow. Only P/E, P/B and dividend yield are used for Financials. Q1: stocks with the lowest multiples within their sector; Q5: stocks with the highest multiples.
Volatility: calculated as the standard deviation of daily total returns over a trailing 12month period. Q1: stocks with the lowest volatility on a sector relative basis; Q5: stocks with the highest volatility.
Balance sheet: calculated using net debt/EBITDA (leverage). This is used only for nonfinancial stocks. Q1: stocks with the lowest leverage within their sectors; Q5: stocks with the highest leverage.
Size: calculated using market capitalization. Q1: Largest 20% stocks on a sector relative basis; Q5: Smallest 20% stocks.
Momentum: based on stock performance over a 6 month lookback period (Q1-Q5). Q1: Sector leaders (top 20% performers); Q5: Sector laggards (bottom 20%).
Short Interest: based on Short Interest Days (SI / ADTV). Q1: Lowest Days-to-Cover; Q5: Highest Days-to-Cover. Based on exchange data which is released with a lag.
Goldman Sachs Global Investment Research
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