In today’s post, we introduce another arrow in our quiver of making stocks investing more appealing to everyday investors. Today, we launch our new post type titled “Stock Anatomy”.
What is stock anatomy?
Stock anatomy is an Investor Hangout initiative that aims to make it easier to identify how any stock compares with its Industry Group. Our inspiration was borne out of one of the most popular questions that investors ask; “how do I know what to invest in?”.
Capital market investment poses an inherent problem for the investor; a pool to choose from. It can be argued that when presented with options, people often struggle to identify the right fit unless they are already skilled at doing so.
We decided, at the Investor Hangout, to create this, along with several other analytic models that help to “make choosing from a multitude” easier for both experts and beginners alike. Some of these include a Company Profiler, Stock Rank, and several other incredible tools.
How does stock anatomy work?
The focus of the publication is businesses listed in the NSE 30 index. It is a weekly publication that identifies key financial ratios that most investors look for in businesses. Unlike other articles, though, the stock anatomy goes a step further. We understand that looking at numbers in isolation won’t help the viewer unless they are able to compare it with something else.
The stock anatomy collects information about all Nigeria Stock Exchange (NSE) listed businesses and groups them according to which industry group they belong to. After grouping, we identify the median statistic of each variable, for each industry group, and then compare the company in focus to its industry group’s median statistic to see whether the business is above or below the median statistic.
Median or average?
When we started putting this together, we started off with averages. What we noticed was that in many cases, the average was a figure that was significantly higher or lower than most businesses in the universe.
To make this problem easier to understand, let us use an example. We had a universe of 20 businesses in the same industry group as well as their stock prices. The average price of those stocks turned out to be ₦20. When we counted how many businesses had stock prices above or equal to ₦20, we got 4 or 5 companies out of 20! Why was this so? There were outliers. There were some companies whose stock prices were significantly out of the range of any other in the group. These outliers skewed the average figure and altered the effect we were trying to achieve.
We can define the median as any position in the middle of an ordered sequence. The average is the sum of all values in a universe divided by the constituents of that universe. By these definitions, we can understand why a median is not affected by the effects of outliers while averages show the expected volatility caused by additions or subtractions of outliers. The median will always remain the same (middle), irrespective of the size of the highest or the lowest variables.
Why use Industry Group?
The Industry Group is a classification method created by MSCI to classifying businesses into groups so that it becomes easier to compare businesses on an “apples to apples” basis. For more information on MSCI’s business classification levels, you can visit the MSCI page and learn more.
There are several classification levels that we could have used including grouping businesses by sector or by industry. We settled for Industry Group because unlike Sectors, it is not too broad and unlike Industry, it is not too narrow.
The key determining factor for our choice was based on the few numbers of businesses listed on the exchange we are covering, the Nigerian Stock Exchange. There are fewer than 200 businesses listed here and grouping by sector would have been too broad, making comparisons quite inaccurate. Grouping by industry would have been too diverse for the limited number of businesses available.
What is Fair Value?
One core component of the report that you will be seeing is the Fair Value of a company. To avoid any confusion, let us talk about our Fair Value number. The Fair Value is an Investor Hangout proprietary calculation of what it deems as the average inherent value of a business. To arrive at this figure, the Investor Hangout uses a quantitative method to analyze metrics including:
- Present Value of excess returns
- Present Value of Terminal Value
- Earnings per share
- Book Value per share, and a few others.
Our model takes these variables and computes an average value for each company using terms that reflect the business climate of the market covered.
Now that we have cleared the air on the stock anatomy and how it works, let’s get right into it. As the first post in this series, we had to make the necessary introductions and explanations. Subsequent posts will be direct to the point and not as long.
What is in the Stock Anatomy?
The stock anatomy contains key financial ratios and metrics about a particular company. It compares each of these numbers with the company’s industry median. The results are displayed as a visual that is colour coded as follows:
- Red – When the company’s number for that particular stat is below the industry’s median
- White – When the number is exactly equal to or slightly above the industry group’s median by a modest margin
- Green – When the company’s stat is well above the industry’s median
The table below shows the metrics, description and implication of each metric included in the stock anatomy.
| wdt_ID | VARIABLE | DESCRIPTION | WHAT DOES IT TELL YOU? |
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