Feature Stories | Aug 10 2009
By Rudi Filapek-Vandyck
FNArena has just launched a new service on its website; the FNArena R-Factor.
The new service allows investors and share market researchers to compare ASX200 stocks against each other. From now onwards, subscribers at FNArena have the ability to look two years ahead (beyond FY09), but also to compare projected growth rates, implied valuations and potential dividends not only against historical references, but in a relative sense against other constituents of the S&P/ASX200 index.
Of course, we have included the ability to cross-check inside sectors.
In fact, we have included quite a few extra-tools and services. If you are a current subscriber or trialist we hereby invite you to check the new addition out on the website. FNArena believes the new service is unique and offers a point of view that was not available in the market until today.
If you are currently not a paying subscriber, but you have trialled our service in the past, we ask for a little patience only. Soon we will offer you the chance to temporarily access our website and all services present, including the R-Factor, so you can have a good look as well.
For those interested to learn more about the new service, here’s an official introduction:
FNArena’s The R-Factor
(R stands for “Relativity”; “Relative to the rest of the market”)
It’s probably a good idea to first explain what FNArena’s R-Factor is not. It is not a never-fail automated ranking system that aims at providing investors with losers and winners among listed stocks. In fact, a ranking is generated but this doesn’t mean the stock on position number two will guaranteed perform better than the one on 187.
As with all rankings and tools, there is always a plethora of market moving factors that cannot be captured into any automated model, such as investor sentiment, market momentum, economic cycles, sectoral rotations and unexpected events. In addition, the R-Factor is based on market expectations. This comes with inherent flaws. Expectations move and support share prices, but at the end of the day, they are just that, expectations.
Analyst expectations are only a reflection of what is known right now (sometimes not even that). So what is missing is what is yet to come but has not yet been captured in forward projections. This can be a new contract, or a change in trend, a corporate approach, a sudden spike in product sales or in product price – how about a sudden reversal in circumstances for the market overall? What the system also doesn’t register is operational or balance sheet risks.
One should never treat market expectations as unquestionable gospel, but in the same breath, these expectations, when combined, refined and put into consensus calculations, are there to be used as a benchmark against which investment considerations can be made.
FNArena’s R-Factor offers investors the opportunity to view the Australian share market from a different point of view. Instead of weighing a certain stock on its individual merits, as we all tend to do under “normal” circumstances, the R-Factor offers the opportunity to view stocks on a relative basis against the rest of the share market.
Due to the complexity of this exercise as well as the limited availability of reliable sources of company forecasts, we have limited the group of companies involved to constituents of the S&P/ASX200 index (we will investigate whether it is possible to extend the number of companies at a later stage). This allows investors to weigh up the individual characteristics of an individual company against the other top-200 stocks in the Australian share market.
Investors can already use historical feedback in their research. Now, the R-Factor allows questions to be answered such as: is the anticipated growth rate high compared to what is available elsewhere? Is this valuation cheap/pricey compared to valuations elsewhere? Is the projected dividend yield below or above the market standard?
The R-Factor is designed to assist a medium to longer term research horizon. It captures a two year look into the future based upon projected growth rates for earnings per share (EPS), implied valuations (Price-Earnings Ratio) and what can be expected in terms of dividend yields.
As such, the R-Factor tries to determine where the best growth is located, at the relative cheapest price and the highest dividend yield. (An alternative ranking without dividends is also available).
The potential benefits of this approach are simple and straightforward: what good is it to chase the highest growth available when valuation is already over the top? Alternatively, a company offering little or no growth might well turn out a good opportunity if its valuation has fallen to extreme lows.
These two scenarios lay bare some of the essential flaws of the R-Factor: because a certain stock is already expensively priced, this doesn’t mean it cannot become even more expensive. Also, seeking valuation opportunities among beaten down stocks comes with a higher degree of risk.
This is why a stock with a low ranking is not necessarily a better option than one with a higher ranking – investors have to take into account factors such as risk, market momentum and tomorrow’s likely changes. Note, for instance, that company rankings can change due to two factors: share price movements and changes in expectations. Both can cause significant changes in the rankings.
Note also that the R-Factor does not provide investors with any indication about the value, direction or momentum of the market as a whole. These are considerations investors will have to make themselves. It is simply a tool that allows investors to compare individual companies against each other, to see where growth is expected to be, how much value is already attached to this growth, and how much in dividends is to be expected on top of this.
You’ll see that we have included options to search and compare within sectors, to set up a personal Watch List and to look at your Portfolio through the lens of the R-Factor.
When doing your research, you’ll find that excluding dividends often doesn’t make much difference in the relative rankings. This suggests that investors value stocks predominantly on growth and risks. This offers both opportunities and potential pitfalls. Investors should always be mindful that an extremely high implied dividend yield, as well as an extremely low share price valuation do not necessarily mean an obvious opportunity lies up for grabs. This is how the market indicates these stocks come with an elevated degree of risk.
Similarly, companies with extremely low dividend yields and a high valuation are probably indicating other factors are in play, other than simple growth. Is there potential for a corporate suitor? Or maybe the potential for a major expansion? Some stocks will always attract the imagination of investors, more than their pure fundamentals seem to justify.
Any experienced investor knows many factors can influence the direction and valuation of share prices, and not just for a limited time. The R-Factor gives investors the opportunity to view and research the top-200 stocks in terms of growth, valuation and dividends; based on consensus expectations; relative against each other; two years out into the future.
The R-Factor uses six factors to rank all stocks (EPS growth, PER and dividend, each for two years) and the ultimate ranking combines all six sub-rankings on an equally weighted basis. In other words: there is no preference or favouritism build-in – all six rankings carry an equal weight. Investors can view and research all six sub-rankings to assist them in their research and considerations.
The R-Factor has, even prior to its official launch on the FNArena website, already provided team members at FNArena with new insights into Australian shares and the share market. This has already led to the publication of various stories and analyses:
(See Rudi On Thursday and Weekly Analysis on the website)
More will follow in the future.
Note also: EPS growth rates have been limited between 100% and minus 100%, negative PE ratios have been converted to N/A and some companies (six at the initial count) have been left without data due to either unavailability and/or unreliability of forecasts. The rankings are standard being updated once per day (around noon) unless FNArena decides an (extra) update at another time of the day is required for best practice.
FNArena believes the R-Factor is unique in its kind and only available through our website. It is up to our members to value this tool and discover its true benefits and merits.
Finally, as with everything we do at FNArena, the R-Factor is simply a tool designed to make the share market more transparent and to assist investors in their research and their judgments. This service is provided for informational purposes only. FNArena does not provide investment advice. We are unaware of your financial means, your personal goals, targets and aspirations, as well as your risk profile.
The R-Factor does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. Investors should contact their personal adviser before making any investment decision.