A Fundamental Map of the Market

I have been starting to work on fundamental analysis since May. I wrote a few pieces:

• on Stock Valuation
• on Value Investing
• notes on IB financial statements

The full map of the financial statements can be seen here.

Map by Sector and Industry

• median earning yield is 4.5% and growth is 8%
• average earning yield is 0.3% and growth 12%, showing that the market has large valuation for much less profitable, higher growth companies.
• there are 10 sectors that are further partitioned in "industries"
• some sector such as Energy, Finance or Technology dominate depending on the favour of the market
• Financials and basic material earning yield median is double than the median
• Healthcare, technology and energy have half the median earning yield.
• Finance is much more capital intensive, as tested by lower turnover, followed by real estate and utilities.

K-means Fundamental Cluster

Rather than group companies in sectors, a possibility is to create clusters based on their fundamental data.

Companies with any outlier data are removed, resulting in 10% of companies removed, and data are normalized to scores. The criteria are:

• consensus recommendation (to incorporate analysts ratings)
• avg earning yield (which is sales/price times the average profit margin)
• stressed earning yield (a quantity stressed down at 2 sd of margins)
• growth (geom average sales growth)
• stressed growth (sales growth stressed down 2 sd)
• dilution (to assess shareholder friendly behavior)
• margin (to identify moat)
• shareholder yield (dividend + buyback yield, to identify shareholder friendly behavior)
• turnover (sales/asset, to assess capital intensiveness)

Other indicators we produce but do not use for clustering are:

• cf margin (which is the ratio of cf from financing / sales, which is akin to profit margin unless company invests or divests)
• RandD margin (which is the ratio of R and D expense over sales, which identify high tech businesses)
• Valuation Ratio, Stressed Ratio, stressed Ratio Paid (distributed to shareholders), Ratio from analysts price target

We observe the following clusters

• loss making companies with high sales growth 46 (service now), or not consistently profitable with high growth 89 (haidilao etc)
• high yield, high growth companies 1 (aapl, msft, meta, asm,...) or with high capital intensity 11: (realty income corp, financials)
• 60: low yield, high growth (amzn, Intuit)
• 58 mid yield, mid growth (texas inst, hermes, shimano)
• high earning yield 6 (China Life, Hutchinson and mostly Chinese) 84: mostly Chinese, Eurazeo, 40: high earning yield, unstable growth (Deutsche Post, Seb, Daimler Truck)