The primary objective of "The Quant Report" is to provide investors who are interested in investing in Indian markets with data to support their investment decisions.   

Aims and Objectives

The Quant Report aims to present historical quantitative data in a manner which presents potential valuation to a wide variety of investors.

The Value Grid 

The primary function of The Value Grid is to highlight valuation risk.  This is a purely quant driven approach which intends to eliminate analyst bias.  Investor bias remains important; please refer to Using The Quant Report for a better understanding of using the value grid.

For long term buy and hold investors, the report contains calculated fair values, bear values and Graham intrinsic values together with Graham buy targets for individual stocks and broad markets. Markets almost always trade at a premium to fair values.   During recessions and contractions, prices trend to or towards fair value.  Mid caps and small caps will tend to break to bear value.  Large caps from defensive sectors will tend to halt at or near fair values.  Large caps in cyclical sectors will normally approach bear values.  Most leveraged entities will tend towards bear values.  Companies with financial risk (leverage) and a cyclical categorization or a small/mid cap will tend to trade well below bear value. 

This is a time when perceived risk is high, but risk is priced; thus real risk is low.  It is a time to buy.

For cycle investors who typically take a five to six year view, fair and bear values would be good buy side indicators. 

Booking of profits and exit decisions for cycle investors will be facilitated through other data on the report.  The data includes historic multiple based targets derived by applying PE 6 multiples which ran during the past decade.  The PE 6 multiple measures annual average prices divided by 6 year median earnings per share; the aim is to derive a valuation metric based on long term earnings potential over an economic cycle instead of using a single year or quarter.

The data also presents moderated valuations (labeled on the report as "Moderated") which seeks to value stocks at multiples which are based on long term growth, investor return and dividend payout expectations; this data relies more on forward expectations than on historic performance and is particularly useful when markets are in transition from secular bull to secular bear conditions. 

The data also presents a forward cycle view (labeled as "Mod 2" on the report), assuming no growth in the forward cycle earnings, using the same return and dividend payout assumptions as in the moderated data; this data is useful in the exceptional circumstances we see today - while it is likely that EPS will rise from trough levels, the devastating impact of 2008 and 2009 earnings will likely mean there will be no growth in cycle EPS.  This means that by 2014, 6 year median EPS will be no more than it was by end 2008; such a fact pattern can put a lid on how high markets will rise; unfortunately it also opens up downside risks. Users should apply their judgment in deciding which set of values should be used. 

Generally a person expecting growth consistent with that in the prior economic cycle would use the the "Historic Multiples" based values highlighted in blue on the report.  A person expecting forward growth rates in line with real GDP plus long term inflation rates should use the "Moderated" values.  A person who believes that no growth will occur; i.e. the 6 year median earnings will be the same as it is today in 6 years time, should use the "Mod 2" values.  These valuations should be used to facilitate decisions to book profits and/or exit a position.

For those with a shorter term horizon (12 months to 24 months) the market gauges potential value levels for the year in progress and the following year; keep in mind these are calender years unlike the data which is in fiscal years.  The data offers a view using the same "historic multiple", "Moderated" and "Mod 2" methodologies.  The idea would be to buy using normal or lower and to exit at bull valuations of better.

For those with an even shorter horizon, the data contains typical quarterly trading ranges which can be expected if the market performs at top quartile, normal and bottom quartile multiples which have run over the past decade.  This data is designed for normal market conditions and only when the markets are in an uptrend; it does not work during recessions and bear markets.  During bear markets, short horizon investors should focus on bear and fair values for buy points, or indeed for points at which a short sale should be covered. 

Cycle and short horizon investors should note that during the past decade we have seen higher than normal PE 6 multiples; these multiples are unlikely to apply during the forward cycle - during periods of multiple resets this data is of limited use - it does however tend to provide indicative values as risk aversion abates.  A word of caution - it is probably a good idea to use targets at bottom quartile PE 6 as a normal market targets and use targets at median quartile PE 6 as a bull market targets - the impact of bursting of the credit and housing bubble is expected to have a lasting impact.

The data is designed primarily with value investors in mind.  It uses investor return requirements at a slight premium to very long term stock market returns.  While "Historic Multiples", "Moderated" and "Mod 2" present different perspectives, the author & model leans towards presuming forward growth at no more than very long term nominal GDP growth rates.  The reason is simple; no one can predict growth accurately; using very long term nominal GDP growth rates results in disciplined and conservative buy targets.  History is important; for instance no one can tell you drilling rig day rates for ultra deepwater vessels will rise from $200k/day to $650k/day - history tells the story of how a company exploited the growth opportunity when it arose. Similarly, no one could predict the financial crisis; historic data tells the story of how individual companies responded to survive the time of turmoil.  History tells the tale of management competence; and management competence is a key indicator of operational risk.  Assessing management competence together with buying when the price is right helps. No doubt it is better to buy quality at fair value, than trash cheap; equally, buying quality expensive can hurt.

One significant advantage of this model is to focus investors on valuations. Putting down historic data on a single data sheet, with valuation techniques used to present bear, fair and normal and bull values is useful. A person might be a bull or a bear, but to invest successfully, transitioning from one to the other by examining the assumptions of valuation used by investors of different perspective is important.

The Value Grid also includes several key economic indicators which are useful in assesing economic risk.  These indicators can help identifying the present position in the economic cycle.  For example, an inverted yield curve might indicate that a slowdown lies ahead.  A flat yield curve together with narrowing spread between government and corporate bonds can indicate excessive risk taking.  A steep yield curve can be an indicator of a nascent recovery.

The Value Data

The value data included in The Quant Report provides a recap of ten years of financial data.  This is useful in assessing operational risk, identifying opportunity from earnings volatility in cyclical stocks and in assessing management performance.

It also contains data for financial leverage from the most recently available balance sheet, which helps assess financial risk.  Financial risk is the risk associated with the leverage embedded in the corporate capital structure.  High leverage can lead to a threat of future dilutive capital events; it also results in greater than normal earnings volatility.  These risks normally get fully priced during recessions and influence share values much les during periods of normalcy.

It also includes data which can be used to assess future growth potential.  And it does include data which helps understand how companies have created and returned shareholder value.  More details can be found on "Getting the Most Out of The Quant Report".

The Charts

The Quant Report comes with 5 graphs which provide a unique perspective of market levels benchmarked against earnings and valuation indicators.  It also provides a perspective of how a normal market might evole absent a recession. 

These charts should not be confused with technical analysis; it is merely a presenting valuation in a picture as opposed to words.

User Notes

All data included on "The Quant Report" is there for a purpose.  Understanding the rationale for data inclusion goes a long way in how to get the most out of the report.  "Getting the Most Out of The Quant Report" means understanding why the data is there and how to use it.  You can view a detailed write up here.

In addition, download and browse through the comments on this xls file to understand the contents of "The Quant Report"; do visit all tabs on the workbook.

Understanding The Quant Report

Finally, download and browse through this pdf file to understand how economic indicators on "The Quant Report" can be used as a guide to sector rotation and investing during different phases of a typical economic cycle.

Using Economic Indicators on The Quant Report

Last but not the least, please also read the Terms related to use of Information and usage thereof.