Traders watching the movements of United Utilities Group PLC (UU..L) might be interested in how the quality ratios are stacking up for the shares.  Robert Novy-Marx, a professor at the university of Rochester, discovered that gross profitability has as much power predicting stock returns as traditional value metrics. He found that while other quality measures had some predictive power, especially on small caps and in conjunction with value measures, gross profitability generates significant excess returns as a stand alone strategy, especially on large cap stocks.The Gross profitability for United Utilities Group PLC (UU..L) is 0.122175.

As we move deeper into earnings season, investors and analysts will be closely watching which companies look they are getting things right. Many investors will be following which companies beat or miss the estimates by a wide margin. Large surprise factors can cause a stock to jump or fall shortly after the actual numbers are released. Investors may also be tracking which industry leaders come out on top during the latest round of earnings reports. Tracking the sectors that are poised for growth may help give the investor a good idea for the types of stocks they may want to add to the portfolio as we get closer to the end of the current calendar year.

Professor Novy-Marx’s key insight was that you don’t need to go further down the income statement as these numbers may get manipulated with accounting tricks. To identify really profitable firms, one should look at the top line, not the bottom line. In one of his papers, Novy-Marx compares gross profitability to the other most famous strategies such as Greenblatt magic formula, Piortoski F-Score, etc.

Many investors enter the stock market without a plan in place. Investment goals may be a highly important part of coming out on top. Investors may need to set realistic and measureable goals in order to build a baseline for success. Defining investment goals clearly can help keep individual investors from making common mistakes and losing their shirts. Creating a plan for entering the equity market may start by setting up goals and outlining the objectives of the individual. These goals can differ depending on the person and situation. Many investors will opt to follow strategies put in place by others. This may work fine for some, but not as well for others. Keeping a close eye on particular stocks in the portfolio may help the investor when the time comes to adjust the holdings. Being able to adapt to rapidly changing market environments may turn out to be immensely important when the winds of uncertainty blow in.

Total Asset Growth

In their 2008 paper, professors Cooper, Gulen and Schill provided evidence that a firm’s assets growth rates are strong predictors of future abnormal returns.

“The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spin-offs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns.” – Cooper, Gulen & Shill in Asset Growth and the Cross-Section of Stock Returns. In a study on US data during the period 1967-2007, they find that:

– A hedge portfolio rebalanced annually that is long (short) the stocks of companies with the lowest (highest) percentage growth in total assets over the previous 12 months generates an average annual return of 22%.
– This asset growth effect is stronger for small capitalization stocks, but is still substantial for large capitalization stocks.
– The effect is strongest in the month of January.
– Asset growth rate retains large explanatory power for future stock returns after accounting for firm size, book-to-market ratio and momentum. In fact the asset growth effect is at least as powerful in explaining returns as these other widely used factors.

We calculate asset growth as follows:

Total Asset Growth = (Total AssetsTotal Assets y-1) − 1. United Utilities Group PLC (UU..L) has a total asset growth number of 0.046467.

Net Debt to Market Cap

This ratio gives a sense of how much debt a company has relative to its market value. Companies with high debt levels compared to their peers can be volatile. We calculate it as follows:

Net Debt to Market Cap = (Total Debt−Cash and ST Investments) / Market Cap

United Utilities Group PLC (UU..L) has a net debt to market cap ratio of 0.014787.

Altman Z Score

United Utilities Group PLC (UU..L) has an Altman Z score of 0.923067. The Z-Score for predicting bankruptcy was published in 1968 by Edward I. Altman, who was assistant professor of finance at New York University at that time. It measures the financial health of a company based on a set of income and balance sheet values. The Altman Z-Score predicts the probability that a firm will go bankrupt within 2 years. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years before the event. In a series of subsequent tests, the model was found to be approximately 80%–90% accurate in predicting bankruptcy one year before the event

Atman built the model by applying the statistical method of discriminant analysis to a dataset of publicly held manufacturers. Since then he has published new versions based on other datasets for private manufacturing (Z’-Score), non-manufacturing, service companies and companies in emerging markets. (Z”-Score)

Please also note that the original dataset used was quite small and consisted of only 66 firms of which half filed for bankruptcy. All companies were manufacturers and small firms (total assets less than $1m) were removed.

Investing in the stock market may include having to keep emotions in check. When things get crazy, investors may be forced with tough decisions. Being able to stay away from impulsive decisions may help when the time comes to tweak the portfolio. Having the proper discipline and market perspective may also be a highly desirable trait for a successful trader. Investors who are able to practice discipline may be able to avoid emotional trading pitfalls in the future. Even highly experienced investors may have to someday make the difficult decisions in order to keep the portfolio strong. Figuring out what works and what doesn’t may take many years of trial and error. Learning to filter through the daily noise can be a big asset when trying to focus on the particularly important information.

VC3

Value Composite Three (VC3) is another adaptation of O’Shaughnessy’s value composite but here he combines the factors used in VC1 with buyback yield. This factor is interesting for investors who’re looking for stocks with the best value characteristics, but are indifferent to whether these companies pay a dividend.

VC3 is the combination of the following factors:

Price-to-Book
Price-to-Earnings
Price-to-Sales
EBITDA/EV
Price-to-Cash flow
Buyback Yield

As with the VC1 and VC2, companies are put into groups from 1 to 100 for each ratio and the individual scores are summed up. This total score is then put into groups again from 1 to 100. 1 is cheap, 100 is expensive.

The scorecard also displays variants of the VC3 where the score is calculated for the selected company compared to peer companies in the same industry, industry group or sector.

Please note that we use Book-to-Market instead of P/B since it allows a more accurate sorting compared to P/B. Stocks with a high B/M show up at the top of the list, stocks with negative B/M are at the bottom of the list. For the same reason we use Earnings-to-Price instead of Price-to-Earnings and Cash flow-to-price instead instead of Price-to-cash flow.

Also important is that we always make sure that companies with the same score get added to the same percentile. For stock universes where the number of stocks is less than 100, we make sure that the stocks are still allocated to percentiles from 0 to 100 instead of 0 to the total number of stocks. This is particularly relevant for the industry, industry group or sector variants where if additional filters are used, the number of stocks often drops below 100.

United Utilities Group PLC (UU..L) has a VC3 of 16.

Individuals invest in order to get a return on the investment. Nobody enters the equity markets with the hope of losing money. Returns on investments may come in different forms. With any stock investment, there may be some level of risk involved. Understanding the risk is important and should be considered very carefully. Of course, the stock may go up and become a winner, or shares could sour and turn into losers. Returns in the stock market may often mimic the amount of risk. Generally speaking, the greater the risk, the greater the reward. With the greater chance of reward comes the greater chance of losses. Keeping a balanced and diversified portfolio can help manage the risk associated with investing in the stock market.

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