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¡ We found the best fundamental equity ratio !
ruben ruiz
edited Oct 3, 2017

Hello everyone,

Spending some free time on Bloomberg with the only purpose of finding the best ratio to evaluate a stock from the fundamental point perspective, lead me to this treasure.

What was I looking for ? A ratio which could basically tell me if I should invest on the company or not, pretty clear.

This is what we found: The Consesus Rating.

What is the Consensus Rating ? It's a measure calculated from Bloomberg which probably the simpliest math ever. It gives points according the analyst recommendation from a broker house:

5 points if it's BUY
3 points if it's HOLD
1 point if it's SELL

Then it just does the simple aritmetic average. Therefore the closest to 5 will mean most of the brokers will have a BUY recommendation and this is the Key here !

Why is this value that important ?Because I'm working at one of those brokers I can tell you that BUY recomendations will be pushed from the Sales team wich will lead to purchases from the Hedge funds, pension funds, family offices and rest of the institutional investors and therefore an increase on the price.

A conspirancy hater could say: "Well, but some brokers recommend to BUY because they bought that stock some days ago". Hello Goldman? and this is where this ratio is coming from, it's a concensus so is also taking in mind all independent equity research houses, banks, brokers, and investment banks.

To sum up, the good points:

*Easy to compare.

*Easy to extract from bloomberg: the formula is: =BDP(Bloomberg Ticker; "EQY_REC_CONS").

*Consider all the analyst recommendations in the market.

To conclude: This is the example of the the Consensus Rating:

*Orange: 22 buys, 7 holds, 2 sells = 4.26
*Banco Santander: 15 buys, 16 holds, 3 sells = 3.68
*Adidas: 16 buys, 18 holds, 5 sells = 3.56
*Bayer: 20 buys, 11 holds, 0 sells = 4.26

Others recomendations:

L'oreal = 3.24
Vinci = 4.07
BBVA =3.17
ASML Holding = 3.94
Total = 4.21
Air liquide = 3.07
Danone = 3.66
Essilor = 4.19

Now the question is... ¿ How much should be the ratio to buy ?Above 3.8 or maybe above 4.2 ? and Should we short it if is less than 3 or 2,5 ?

Open questions that maybe need a backtesting. Let me know if you want to see a second part of this post with a backtesting from Quantopian.

Ciao and Good coding.

7 responses
Ivory Ant
Oct 3, 2017

Did you check if this hypothesis actually holds?

ruben ruiz
Oct 3, 2017

Hello Ivory,

Thanks for your question. The good news are Bloomberg lets to get this data on time and therefore to know how much was the the Consesus Rating on time doing possilbe a backtesting. So, if I see the some interest from the community I could share the data for the S&P 500 companies for the last years, (probably quarterly) since the analysts are usually changing their recommendations and target price after the earning releases.

Have a nice day.

Dan Dunn
Oct 3, 2017

Alphalens was designed to evaluate signals like this. With alphalens you can quickly evaluate your factor and see if has predictive value.

It sounds like an interesting idea, but it needs the analysis to see if it's valuable.

If you identify a signal (either a data set or a factor built on a data set) that meets the criteria of what Quantopian is looking for, we will incorporate the data set into our platform, and make an allocation similar to how we do for algorithms.

Disclaimer

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

ruben ruiz
Oct 4, 2017

Hello Dan,

Thank you for sharing the infromation of Alphalens, it really useful. I' ll take a look into it doing a backtesting. Let's see how the consensus of the analyst recommendations may affect to the stocks' performance.

Have a nice day.

Grant Kiehne
Oct 4, 2017

Hi Dan -

This sounds like something new:

If you identify a signal (either a data set or a factor built on a data set) that meets the criteria of what Quantopian is looking for, we will incorporate the data set into our platform, and make an allocation similar to how we do for algorithms.

Are you now funding data sets and factors, in addition to full-up trading algos? If so, what are the requirements, and how would one submit an idea for evaluation?

Grant Kiehne
Oct 5, 2017

Hi Dan -

A follow-on question: if one found a signal that meets your criteria for an allocation, then wouldn't it be better to simply write an algo that uses the signal for trading? Why would one put it out to the masses? Wouldn't that tend to kill it, if it truly provides an undiscovered edge ("new alpha")? Sorry, just not quite following the logic here...

Nathan Ramos
Feb 28, 2020

Ruben, you have found nothing until you have an out-of-sample backtest prove your sell-side analyst factor has predictive power.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.