Tag Archives: investment

Technology in 2015, Part 1: An Eventful Year

As the year draws to a close we take a look at the technology sector, where key players are emerging, merging, expanding, metamorphosing, splitting or even getting wiped out. There has been much innovation across the board and the

Oil Prices- The Asset Allocation Perspective

We see meaningful contagion, should an unexpected decline in oil prices spill over to equity and credit markets. We usually see lower energy prices as a net positive for riskier assets such as equities and high-yield bonds. Despite the recent declines in energy prices, we maintain our modest overweight to equity and high-yield bonds. With oil prices continuing to fall we have been spending an increasing amount of time analyzing and debating the impact of lower energy prices on our portfolios. In the short term our main concern is that we see meaningful contagion, should a sharp and largely unexpected decline in oil prices spill over to equity and credit markets, resulting in a significant “risk-off” event. To some extent we have seen that happen over the last few months, but considering that West Texas Intermediate (NYSE: WTI ) Oil has declined 40% since June 30, the impact on U.S. equities and credit markets has been relatively modest so far. The closing of a mutual fund last week – Third Avenue’s Focused Credit Fund – received a significant amount of media coverage and has continued to spook the markets this week. But we must be careful not to apply what happened to this specific fund to the broader credit markets. Specific to the Third Avenue fund, it was modest in size and held a significantly greater amount of distressed assets than the vast majority of dedicated high-yield bond funds. So while risks are no doubt elevated, we think the probability of a full-blown credit crisis remains relatively low. But if oil falls further from already low levels, the potential for contagion increases. As asset allocators with a long time horizon (strategic time horizons of 10+ years and tactical horizons of 12 to 18+ months), we usually see lower energy prices as a net positive for riskier assets such as equities and high-yield bonds, particularly for countries that are net importers such as the U.S. and most of developed Europe and Asia. The argument is that gasoline prices act like a consumer tax: when prices decline consumers will spend more, stimulating the economy. Yet the speed of the decline is increasingly concerning, as is the fact that the credit market is structured differently than it was during other periods when oil dropped quickly. Two of these structural differences in the credit markets concern us. First, dealers are holding significantly less inventory as a percentage of total issuance. This is the result of post-crisis regulation that limits dealers’ ability to be the source of liquidity to the extent they were in the past. Secondly, the credit sector is much more exposed to energy today than in the past. This is the result of the availability of cheap credit over the past several years, combined with expectations that energy prices would remain well above the marginal cost of production. Despite the recent declines in energy prices, we maintain our modest overweight to equity and high-yield bonds. We believe the higher interest rates offered by high-yield bonds compensate investors for this risk. But we remain focused on this issue and re-evaluate our view daily, given the increased volatility in energy prices and the broader markets.

New Valuation Approach – PTR: PTR-Based Fund Delivers Over 63% Annual Returns In Big Data Simulations

A new approach to stock valuation looks at the relationship of the stock price to the value of the patent technology owned by the firm. Simulations indicate that stocks with low price-to-technology ratios outperform the market. Investors may wish to include PTR valuations as part of a stock-screening exercise. A former student approached me with a new model for stock valuation that appears to have great promise. Wisdomain.com has a database with comprehensive information on patents which has been used by intellectual property professionals to manage technology. Recently, the company figured out a Price/Technology ratio that appears to be a powerful tool for screening technology investments. PTR challenges the conventional principles of long-term value investing. It takes a completely objective approach to valuation through the mining of intellectual property big data and combining it with financial big data. It is an investment indicator that provides insights into the future performance of investments by identifying undervalued companies that possess patented technologies. Because patent valuation is technology valuation, PTR uses a proprietary algorithm based on technology valuation and total market capitalization data to identify undervalued technology companies. PTR = Market Capitalization Σ (Total Value of Patents) Σ (Total Value of Patents) = Total Technology Asset Value Technology assets play a key role in facilitating the competitiveness of a company in most industries. Since the sum of the value of all of the patents owned by a company is a good proxy for the value of the technology assets owned, it can be considered to be tied to the future potential profitability of the company. Although the formula is similar to the P/E ratio in that the companies with relatively lower PTR values are considered to be the undervalued companies, it is also completely different. Historical simulations of a PTR index formed by PTR funds comprised of the top 20 lowest PTR stocks exceed the NASDAQ’s average returns by 46.4% in the 1st year and 71.9% in the 2nd year. Similarly, the simulations show that the low PTR funds outperform the S&P 500 by 5.8% in the 1st month and 78.8% by the 2nd year. The PTR Index outperforms the market 100% of the time during the simulation period, and funds held over longer periods result in higher returns relative to the market. (click to enlarge) Simulation period = 2010-2015; PTR, NASDAQ, and S&P 500 values have been normalized to 1,000; Funds purchased on a daily basis over the course of the simulation period to minimize the effect of daily variations in stock prices and obtain the average performance values of the funds over the investment periods within the simulation period. The PTR investment model shown above is based on long-term investments into funds comprised of 20 low PTR companies. There were individual cases among the 20 lowest PTR stocks where the stock demonstrated negative returns; however, funds created by combining the 20 lowest PTR stocks have been shown to deliver positive returns. Although investments into individual stocks with the lowest PTR values do not guarantee positive returns, the PTR as a stand-alone indicator has proven to be quite successful. The top 15 companies with the lowest PTR values that are currently traded on the NASDAQ and NYSE are as follows. DMRC , ESIO , CKP , RIGL , IMMU , SNMX , UIS , ROVI , SGI , ARRY , OCLR , AMD , IMI , XNPT and HTCH . (click to enlarge) Although the simulations above demonstrate that the PTR is a breakthrough investment indicator for technology-driven companies, analysts are still in the early stages of developing the methodologies to maximize profitability through the application of the PTR. Some interesting findings to date have shown that the PTR stocks in the smaller market capitalization categories demonstrate better performance relative to PTR stocks in the larger market capitalization categories. With this level of performance, it will be interesting to see what else the PTR has in store for us.