It’s the basis of modern finance: stock valuation. But it’s also proven to be nearly impossible. That difficulty, in many ways, has shaped the industry. For one thing, it helps explains why so many advisors aren’t stock-pickers. And by extension, it helps explain the popularity of strategies like sector rotation and products like ETFs.
But even if you outsource stock picking, or buy only mutual funds, somebody somewhere has to pick stocks. And that job may have gotten a little bit easier with the introduction of a research platform called Comps Companion from OCE Interactive.
This is a “next-generation” version of the firm’s Market Topographer product introduced last year, says Jonathan Greenberg, president of OCE. It’s the same basic statistical model, but the difference comes in the broader scope of the analysis, he says. Market Topographer allowed a user to compare trading multiples with each other, he says. The new product allows a user to look a peer group as a whole.
Through a number of measures, it basically tells you how a stock should be trading compared to a peer group, Greenberg says. Characterizing the product as a bridge between quantitative finance and fundamental analysis, he says it benchmarks a stock against the average profile of the peer group, as well as each member of that group.
The idea of determining value by comparisons to a peer group is not exactly new. In a general sense, that’s the underlying idea in the traditional capital-asset-pricing model used widely in portfolio construction. And in a very specific way, it’s the idea behind home comparables used to gauge the value of a house. But in this case, it also tells you why each company is trading at a particular premium or discount to the group, Greenberg says. It can also lay out a time series analysis to show how a stock’s premium or discount has changed over the years.
Greenberg said that the product is generating interest both from buyside and sell-side analysts, as well as corporate treasurers and investor relations pros to help them better understand how their company’s stock is positioned in the market. Greenberg, a Wall Street veteran who started his career at Salomon Brothers, became interested with the factors that really drove stock multiples during the Internet bubble. He was especially intrigued by the reasons those drivers change over time.
Even if you don’t consider yourself a stock picker, a new valuation tool can at least help elevate your discussions with clients. And anything that promotes more dialogue between advisors and client has to be viewed as a plus these days.
After all, your clients have access to a slew of information that wasn’t available in the past. In many cases, they have the same tools that advisors have. And after the financial crisis in recent years, they might not be inclined to be as sanguine as they have in the past.