Monday, May 28th, 2012
The Russell 3,000 is currently up 4.97% year to date, yet the average stock in the index is up 3.98% so far in 2012. This means that the bigger stocks in the market cap weighted index have been doing better than the smaller stocks.
Below is a list of the 35 best performing Russell 3,000 stocks year to date, which are all up more than 75%. There are 16 stocks in the index that are up more than 100% year to date. Arena Pharma (ARNA) is leading the way at 220.86%, followed by Ellie Mae (ELLI) at 175.22% and Vivus (VVUS) at 152.21%. Amylin Pharma (AMLN) and US Airways (LCC) round out the top five. Other notables on the list of 2012′s big winners (so far) include Vertex Pharma (VRTX), AOL, Zillow (Z), Sears (SHLD) and TripAdvisor (TRIP).
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Tags: Amln, Aol, Arena Pharma, Arna, Best Performing Stocks, Elli, Ellie Mae, Leading The Way, Market Cap, Notables, Sears, Shld, Stock Index, Us Airways, Vertex Pharma, Vivus Vvus, Weighted Index
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Thursday, April 5th, 2012
Over one month ago I constructed the following chart that described the two previous occasions where the largest market cap company in the world went parabolic. Not surprisingly, on both occasions it marked the beginning of the end of the run in equities.
I added Apple for contrast, considering it was now the largest market cap company in the world and had also exhibited parabolic price signatures.
Roughly six weeks later, Apple has now firmly left the parabolic stage and has gone straight to the vertical (see Here) horizon. What was a 20 year performance record of 2900% in February – quickly became over 4000%.
I find it interesting and noteworthy, that after yesterdays once again buoyant bid – Apple has pulled up next to Microsoft’s market cap high from 2000 of roughly 586 billion. The following chart has striking balance, albeit a pronounced head and shoulders top – when expressed through the relative performance of the SPX and MSWORLD indices.
Regardless of public opinion, both the informed and the ignorant – a move such as this is unsustainable for Apple and very likely marks a historical highpoint for the company for some time. With that said, and as proven on a daily basis since early December, markets can remain irrational much longer than most suspect.
It should be noted that both previous successors to the title of World’s Largest Market Cap (that went parabolic) – certainly did not go bust, but maintained a leadership position within their respective industries. Their valuations simply matured and loss the enormous momentum drive that propelled them to unsustainable growth trajectories.
Unless of course it is different this time…
Copyright © Market Anthropology
Tags: Anthropology, Beginning Of The End, Cap Company, Daily Basis, Different This Time, Growth Trajectories, Head And Shoulders, Highpoint, Leadership Position, Market Cap, Msworld, Performance Record, Public Opinion, Relative Performance, S Market, Six Weeks, Spx, Successors, Unsustainable Growth, Valuations
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Monday, March 19th, 2012
Based on applying Street Consensus for each individual S&P 500 stock to the market-cap weight of the stock in the index, to arrive at the overall consensus.
Friday, March 9th, 2012
Forbes recently released its 2012 list of the world’s billionaires, so we figured we’d post a list of the public companies in the US that are hundred billionaires. There are currently 24 public companies in the US that are worth more than $100 billion. As shown below, Apple is the biggest at close to $500 billion, followed by Exxon Mobil (XOM) at $400 billion, Microsoft (MSFT) at $268 billion, and IBM at $230 billion. Chevron (CVX), Wal-Mart (WMT), General Electric (GE), Google (GOOG), Berkshire (BRK/B), and Procter & Gamble (PG) round out the top ten.
For each company, we also show what its market cap was ten years ago. Apple (AAPL), now the largest company in the world, was by far the smallest company on the list ten years ago at just $8.7 billion. General Electric (GE) was the largest company on the list ten years ago at $403 billion. GE’s market cap has fallen 50% since then.
Tags: Amp, Berkshire, Bespoke Investment Group, Billion Club, Brk B, Chevron, Cvx, Exxon, Exxon Mobil, Forbes, General Electric, Goog, Google, Market Cap, Msft, Procter Amp Gamble, S Market, Wal Mart, Wal Mart Wmt, Xom
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Wednesday, February 29th, 2012
This is simply stunning: one company, which has two flagship products, has a bigger market cap than the entire Semiconductor space, and is just shy of the entire S&P Retail sector.
The 216 hedge funds in the name as of December 31 is hopelessly stale. We are certain that by now this number is at least 250, if not 300.
Thursday, February 9th, 2012
The Truth About Alternative Weighting Methodologies (And ETFs)
As indexes have been essentially transformed into investable assets in part because of surging interest in ETFs, many advisors and investors have begun to take a closer look at the details of the methodologies behind the construction and maintenance of these benchmarks. Cap weighting, where the largest weights are afforded to the largest companies, has remained by far the most popular option–thanks in no small part to the low costs and low maintenance requirements associated with this approach. But alternative weighting strategies have been growing in popularity as well, emerging as opportunities to generate excess returns by simply tweaking the manner in which weights are assigned to individual securities [see also The Ten Commandments of Commodity Investing].
There has been a significant amount of debate on the merits of these weighting methodologies, including at a panel last month at the Inside ETFs Conference presented by Index Universe. Many view the alternative weighting methodologies (meaning anything that is not market cap weighting) as simply a better way to index, thanks to the ability to break the link between stock price and security allocation. There is another school of thought that the various alternative weighting methodologies out there are simply ways of tilting exposure towards various “factors” such as value or leverage. Below, we run through some of the popular alternative weighting methodologies out there from a different perspective: the tilts that result from the nuances of the underlying strategy [for more ETF insights, sign up for the free ETFdb newsletter].
Equal Weight = Small Cap
Equal weighting methodologies have drawn increased interest in recent years, thanks in part to the impressive performance of the Rydex S&P Equal Weights ETF (RSP) relative to the S&P 500 SPDR (SPY). Though both ETFs hold the same 500 stocks, RSP has fared much better for the last several years.
The appeal of RSP lies in the opportunity to break the link between weight and stock price, thereby avoiding what some argue is an embedded inefficiency in this methodology. But there is another way to think of equal weighting: as a shift towards smaller companies. RSP, for example, has a considerably larger allocation to mid cap stocks than does SPY, since the weightings to the stocks with the largest market caps are limited. The focus on smaller companies generally means greater volatility on both the up side and down side; that relationship has certainly played out between RSP and SPY [see also RSP vs. SPY: 2011 At a Glance].
Equal weighting can also be thought of as having a contrarian or anti-momentum tilt, since allocations are brought back to the “base weight” upon rebalancing. That effectively means that weightings in the best performers are reduced, with the proceeds used to purchase shares of stocks that have struggled recently.
Dividend Weight = Value Stocks
Dividend weighted ETFs have also seen increased interest over the last year, emerging as one effective tool for investors looking to enhance current returns and reduce risk. Dividend weighting can also be thought of as a way of implementing a value tilt, since this approach will generally result in a larger weighting to value stocks than a cap-weighted approach. Growth companies that are reinvesting capital will be given a relatively small weight compared to stocks that make hefty payouts. So it shouldn’t be surprising that dividend-weighted ETFs will perform well when value stocks are outperforming but may struggle in environments where growth stocks have the edge [see Dividend ETF Special: 25 ETFs With Juicy Yields].
It should also be noted that dividend-weighted indexes (as well as dividend yield-weighted indexes) will exclude stocks that do not make distributions. In some cases, that means missing out on impressive returns; AAPL, which has skyrocketed in recent years, won’t be found in any dividend-weighted ETF [see also 12 High-Yielding Commodities For 2012].
Revenue Weight = Low Margin, High Debt Companies
While the tilts delivered by the weighting approaches highlighted above may be rather obvious, the ramifications of revenue weighting–where allocations are determined by top line sales–may not be so clear. Relative to cap weighting, this methodology will tend to overweight stocks with thin profit margins (as well as those operating at a loss), since higher earnings (which generally lead to a higher market cap) have no impact on weighting methodology. This explains in part why Ford Motor Company (F) is the fifth largest holding of the RevenueShares Large Cap Fund (RWL) at 1.5% of assets, while the carmaker accounts for just 0.4% of SPY (and is not even in the top 50).
Revenue weighting also tends to introduce a shift toward companies with higher debt-to-equity ratios, since the impact of interest expense is non-existent–only top line revenue matters. Because the equity value (i.e., market cap) can be calculated by deducting debt from overall enterprise value, cap weighted benchmarks would generally give higher weightings towards a company with low debt, all else being equal. Revenue weighting shifts exposure towards companies with higher leverage, which can result in strong performances in bull markets but cause problems when markets fall [see also Three Reasons Why Gold Is Overvalued].
RAFI Weight = Value Stocks
The RAFI methodology developed by Research Affiliates has become quite popular in recent years, and the company has teamed up with multiple ETF issuers to develop products that utilize this approach to security weighting. Rather than relying on one fundamental factor, RAFI weighting uses four: book value, cash flow, sales, and dividends. While many view RAFI indexes as an enhanced beta, it’s also reasonable to see this strategy as another way of tilting exposure towards value stocks and low margin companies, since this approach incorporates two of the factors outlined above [see Do You Need A RAFI ETF?].
The More The Merrier
Ultimately, there is no universally superior weighting methodology that holds the secret to excess returns. Cap weighting will perform well in certain environments, while equal weighting will lead the way in others. The same can be said for all the other strategies out there; dividend-weighted ETFs enjoyed a banner 2011 as interest in stocks offering meaningful current returns surged.
The choice of weighting methodology is a very important one that has the potential to have a major impact on bottom line returns. But keep in mind that weighting methodologies essentially reflect a tilt towards one factor another, whether it be small cap stocks, value stocks, or leveraged stocks. There are environments in which each of those methodologies will perform well, and others in which they will struggle [see also ETFs For The Capital Preservationist].
Disclosure: No positions at time of writing.
ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.
Tags: Benchmarks, Closer Look, Different Perspective, Equal Weight, ETF, Excess Returns, Impressive Performance, Individual Securities, Investable Assets, Low Maintenance, Maintenance Requirements, Market Cap, Methodologies, Michael Johnston, Nuances, Rsp, Rydex, School Of Thought, Small Cap, Stock Price
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Friday, December 9th, 2011
Aleph Blog outlines why he believes “behemoth” companies (i.e. firms with a market value greater than $100 billion) trade at relatively compressed price to earnings ratios:
For Behemoth companies to achieve large earnings growth, they have to find monster-sized innovations to do so. Those don’t come along too regularly. Even for a company as creative as Apple (or Google), it becomes progressively more difficult to create products that will raise earnings by a high percentage quarter after quarter.
As a result it should not be a surprise that Behemoth stocks trade at discounts to the market when global growth prospects are poor. They have more assets and free cash flow to put to work than is useful in a bad environment. Not every environment offers large opportunities.
The below chart outlines, by sector, the market cap of the current 39 behemoths using data from a follow up post at Aleph Blog (he adds even more granularity in his post).
I would also add that I believe these behemoths trade at an aggregate discount due in part by their composition. Financials (and to a lesser extent energy firms) trade at a large discount due to the damage they inflicted upon themselves and the threat of future regulatory restrictions that may impede profitability, both of which may force them to dilute shareholders as they raise / write-down capital. Technology firms on the other hand are constantly threatened by innovation and becoming irrelevant by the next generation of firms (i.e. what happened to Yahoo via Google), thus earnings become difficult to project past even a few years.
Tags: Behemoth, Behemoths, Chart Outlines, Composition, Earnings Growth, Energy Firms, Free Cash Flow, Global Growth, Google, Growth Prospects, Innovations, Market Cap, Next Generation, Price Earnings, Profitability, Ratios, Regulatory Restrictions, Shareholders, Technology Firms, Yahoo Google
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Monday, November 14th, 2011
let’s look at the supply of US stock. Do you realize the level of buybacks that have been going on? Not announced buybacks but tried and true “after the fact” reporting of buybacks is >$100 BILLION for 8 quarters in a row. It has accelerated lately…$118 Billion in Q1 2007, and $158 BILLION in Q2 2008.
Even if we drop back to low $100s for Q3 and Q4 2007 that is anannual buyback bing of just under $500 Billion. On top of that is 6 previous quarters (back half of 2005 and 2006) of another $600 Billion+. So this is $1.1 Trillion of stock value that will be taken out of circulation by year end 2007.
So if we retired on average say $110 Billion a quarter, that is essentially saying we are eliminating 10 huge companies the size of 200th largest stock in the US (market cap $11.8 Billion) … or 40 a year. Or if we move down the scale a bit to the 500th largest company size, which is $5.75 Billion, we are eliminating 20 of those companies a quarter; or 100 a year. These are not tiny fish, these are companies at the bottom end of the SP500…
Of course, two years later in the depths of the financial crisis the story was a tad bit different [Sep 16, 2009: Stock Buybacks Down 72% Year over Year, and at Lowest Levels Since at Least 1998]
But now, four years after the record setting pace we saw in 07, the buyback spree is back at full spigot. Of course, this is an excellent way to boost earnings PER share, especially for slower growth companies who don’t have many other uses for the excess cash and hence are ‘growing’ via this method rather than operationally. Also, corporations can use buybacks to offset the large option offerings executed each quarter (and accounted for on Wall Street as one time events – wink wink). Further, money is so cheap for our largest corporations (thanks Ben!) that some are borrowing simply to retire shares.
Net net, when buybacks start reaching these levels, it does have an impact on the greater market as sizeable chunks of shares are retired. Bloomberg looks at the most recent data:
- U.S. companies are buying back the most stock in four years, taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15 percent cheaper than when the credit crisis began.
- Corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third- highest annual total behind 2006 and 2007, data compiled by Birinyi Associates Inc. show. Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) bought shares for the first time, and Amgen Inc. (AMGN) sold debt to fund its buyback.
- U.S. companies spent 70 percent more on their stock last quarter than a year ago, according to financial filings as of Nov. 11.
- While the Standard & Poor’s 500 Index peaked the last time buybacks were this high, companies in the gauge are generating three times as much cash, price-earnings ratios are lower and 10-year Treasury yields are around 2 percent, data compiled by Bloomberg show.
- U.S. companies spent $376.5 billion on repurchases in the first three quarters of 2011.
- Investors benefit more when executives spend money on equipment to fuel corporate growth or pay out dividends, according to Gregor Smith, a London-based fund manager at Daiwa Asset Management, which oversees $111.3 billion worldwide. “I’d rather see cash used for investment,” he said. “At the end of the day, there is a short-term illusory benefit from having fewer shares in issue.”
- Executives are funding purchases with debt after yields on investment-grade corporate bonds reached a record low of 3.45 percent on Aug. 4, according to Bank of America Merrill Lynch indexes. Borrowing costs have since risen to 3.69 percent.
- Walt Disney Co. (DIS) began the biggest U.S. plan this year, announcing a $16 billion buyback in May, or 20 percent of its market capitalization, according to Birinyi data.
- Buyback announcements reached $119.8 billion in the third quarter, up 67 percent from a year earlier, as the S&P 500 slumped 14 percent in the biggest drop since the end of 2008, according to data compiled by Birinyi and Bloomberg. Companies spent at least $150.6 billion on their own stock in the three months ending Sept. 30, more than any quarter since the final period in 2007, the data show.
Tags: All The Rage, Earnings Per Share, Excess Cash, Financial Crisis, Market Cap, Q1, Q2, Q3, Q4 2007, Record Pace, S&P500, Spigot, Spree, Stock Buybacks, Stock Value, Time Events, Tiny Fish, Trillion, Wink Wink, Year End
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Wednesday, October 12th, 2011
Oracle of Omaha, Warren Buffett, is nothing if not clever. By offering to buy back his holding company’s stock, Berkshire Hathaway (BRKA), for the first time in history, he is in effect offering investors a free put. And the way he is going about this, it will not cost him a penny.
This is no idle threat. Berkshire boasts a gargantuan $77 billion in cash and equivalents on the balance sheet. Buffett prefers to keep at least $20 billion in cash at all times in case a prospective elephant comes into his sites. That still leaves $57 billion for stock buy backs in a company with a market cap of $165 billion. Buffet has said that he will pay no more than a premium of 10% over book value.
Unlike you and I, Buffett likes to buy whole companies instead of shares in listed firms. That’s how he swallowed whole the railroad, Burlington Northern, last year for $40 billion. The company is believed to have doubled in value since then, powered by a massive cash flow.
Buffett’s last try at bottom picking in 2008 worked out fairly well, when he bought $50 billion worth of blue chip stocks like Goldman Sachs (GS), General Electric (GE), and Dow Chemical (DD) for pennies on the dollar. His timing may be early from the point of view of shorter term traders like myself, but they usually turn out well.
Although many describe Berkshire Hathaway as a quasi-index fund, Buffett’s cumulative return since 1964 is 500,000%. Buying one of the world’s best quality, cash flow rich portfolios run by the world’s smartest investor at a big discount with a free put sounds like a deal to me. Many of his holdings are wholly owned and unavailable to investors any other way. Buy the shares, and you’ll get some free See’s Candies at the next shareholder meeting as well, another firm that Berkshire owns.
For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at firstname.lastname@example.org . Please put “Macro Millionaire” in the subject line, as we are getting buried in emails. Hurry up, because our software limits the number of subscribers, and we are running out of places.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
Tags: Berkshire Hathaway, Berkshire Hathaway Stock, Blue Chip Stocks, Brka, Burlington Northern, Cumulative Return, Dow Chemical, Gold, Goldman Sachs, Index Fund, John Thomas, Market Cap, Massive Cash, Oracle Of Omaha, Pennies On The Dollar, Sachs Gs, See S Candies, Stock Buy Backs, Term Traders, Time In History, Warren Buffett
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Thursday, September 22nd, 2011
I’m listening to Cramer, Roach and the other talking heads on TV. Bottom line from these folks is that the market’s a buy. China is not going to have a hard landing says Roach, and according to Cramer THERE WILL NOT BE ANOTHER LEHMAN.
It’s getting impossible to figure what will happen next in this world. But to even think that there is a “0” chance of another TBTF failing is just cheerleading.
There are at least a dozen EU banks who have had their stocks collapse. Their market cap value is less than 1% of assets. The “Short Ban” in Europe is forcing global investors to take defensive positions in bank stocks where trading is not restricted. This is just adding to the selling in the US financial names.
Lehman went bust in a matter of days. The end came after the stock broke $5. When a stock breaks $5 there is a pretty decent chance it is headed to zero. Institutional holders (there are a ton who own this dog) HAVE to off load stocks when the $5 level is breached.
I think that BAC should not trade under $5 based on their book. But that makes no difference at all. “Book” and “logic” have little to do with what is going on today. The problem is that everyone understands the market dynamics. In the present climate the market players will push BAC, knowing that long-term holders will be forced to sell if the “players” prevail.
There is no TARP option this time around. The TBTF argument has been decided. Failure will be permitted this time around. Should things role in this direction the Fed could stand up and purchase a big chunk of BAC assets. But that would be the last decision that Bernanke will make. There is absolutely no stomach left in America for another big bank bailout. There is no “Bernanke Put” in BAC stock.
Cramer is dead wrong. Another Lehman type event is staring us in the face. It will probably come first in Europe, but it will boomerang around and hit BAC hard.
Tags: Bank Bailout, Bank stocks, Boomerang, Bust, Cap Value, Cheerleading, Chunk, Cramer, Decent Chance, Defensive Positions, Global Investors, Institutional Holders, Lehman, Load Stocks, Market Cap, Market Dynamics, Roach, Stock Breaks, Talking Heads, Tbtf
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