FactSet's Taking Risk blog

Q1 2012 Hedge Fund ownership trends: Apple loses favor, Top 50 hedge funds increased exposure to US equities

FactSet Research Systems Inc. — 2012-05-23T12:02:02Z

FactSet's Hedge Fund Ownership report examines the top fifty hedge funds by equity assets and their largest portfolio holdings, purchases, and sales. Read the full analysis at www.factset.com/hedgefund_ownership.

Apple Loses Favor to Google, Others
Last quarter (Q4) Apple was the top holding of 11 of the top 50 hedge funds. However, that number declined to nine by the end of the first quarter. One of the hedge funds that dropped Apple (+38.59% YTD) as a top holding was Renaissance Technologies. The firm nearly cut its position in half (from 1.28 million to 0.74 million shares), resulting in the highest decline (by value) of any holding for the quarter. Apple’s position as the top holding in the Renaissance Technologies’ total portfolio was replaced by McDonald’s (-8.39%), a stock in which Renaissance Technologies doubled its position during Q1 2012.

Overall, within an aggregated portfolio of the top 50 hedge funds, Apple experienced the largest decrease in portfolio exposure of any stock. The starting aggregate portfolio position in the stock decreased by about 18% over the quarter (from 24.2 million shares to 19.8 million shares). Aside from Apple, large sales were made in Motorola Solutions (+3.99%) and Baidu (+4.53%). The decline in portfolio value in these holdings amounted to $1.6 billion and $1.1 billion, respectively. Motorola Solutions now amounts to 0.5% of the aggregate portfolio and Baidu amounts to 0.2%.
Meanwhile, Google (-4.92%) was one of the more popular purchases—aggregate purchases in the stock amounted to 23% of the starting position in the aggregated portfolio. Google is currently the third largest holding of the top 50 hedge funds, behind Apple and LyondellBasell Industries (+22.05%).

Country & Sector Trends
Unlike the largest institutional investors of the world, the top 50 hedge funds dramatically increased their exposure to US equities (see our “Institutional Ownership” report for more details). The group added $11.3 billion in exposure to the country’s equities, which is far more than the declines in exposure the hedge funds realized in China (-$1.2 billion).

The group was most bullish in the Consumer Discretionary sector, where the increase in exposure (+$6.3 billion) more than doubled any other sector but Industrials (+$3.7 billion added). The Consumer Discretionary sector now represents 19.7% of the aggregate portfolio, which is second only to the Information Technology sector (20.0%). The largest declines by value were realized in the Financials (-$2.8 billion) and Information Technology (-$1.0 billion) sectors.

SharkWatch50 Shareholder Activist Trends
The SharkWatch50 is a compilation of 50 significant activist investors as chosen by FactSet. The six SharkWatch50 firms within the top 50 hedge funds were relatively active in the first portion of 2012. Icahn Associates announced three proposals, while Millennium Management and Carlson Capital announced two additional strategic requests. Icahn’s campaigns included a successful replacement of all nine board seats of CVR Energy in connection with Icahn’s takeover offer announced on January 13th. In addition, Icahn made two announcements after quarter-end. The firm urged Amylin to sell itself following a bid from Bristol-Myers, and criticized the board of Mentor Graphics Corporation for not re-nominating two of its board members.

Meanwhile, Millennium Management, a 5.2% holder of Myrexis, Inc., successfully urged the company to rethink its current strategic direction when Myrexis announced it had retained Stifel Nocolaus Weisel. Carlson Capital also complained about the strategic direction of one of its holdings—Information Services Group—and since compromised to appoint one new independent director (down from two) on the company’s board.

Read the entire analysis in this quarter's edition of FactSet Hedge Fund Ownership.

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All of the data used to compile FactSet Hedge Fund Ownership is available in the FactSet workstation. FactSet users, click here to access the templates driving this report.

Q1 2012 institutional ownership highlights: Apple's ownership falls, Two Harbors receives renewed interest

FactSet Research Systems Inc. — 2012-05-23T12:03:55Z

FactSet's Institutional Ownership report examines trends in the equity holdings of institutional investment managers from around the world. Read the full analysis at www.factset.com/institutional_ownership.

Apple’s Institutional Ownership Falls, but Still Nearly Doubles Closest Competitor
Apple, the largest company in the world by market capitalization, also has the largest institutional market value. At an institutional market value of $385 billion, its institutional ownership nearly doubles that of the next highest stock, Exxon Mobil ($200 billion). Microsoft slightly edges Apple as far as the number of institutional holders (2,547 versus 2,489), but Apple’s holders have more concentrated positions in the stock. Amongst its institutional holders, the average portfolio exposure to Apple is 2.4% compared to 1.4% for Microsoft’s holders.

But despite an increase of 48% in the first quarter, Apple’s popularity amongst investors waned in Q1 2012, as institutional ownership fell from 71.2% to 68.8% over the quarter. As the largest seller of Apple in Q1 2012, Putnam Investment Management LLC continued taking active bets in the company, as it was the largest buyer of Apple in Q4 2011. The firm sold over 4.7 million shares, but still holds a 3.5% overall portfolio position in Apple, making the stock Putnam’s largest holding by a factor a two. Meanwhile, by scooping up over 2.1 million shares, Bank of America Merrill Lynch was Apple’s largest buyer.

Two Harbors Investment Receives Renewed Institutional Interest
Two Harbors Investment Corp., a residential REIT, experienced the largest increase in institutional ownership (under certain specifications). Although the top 10 shareholders from one year ago cut their relative stake in half (from nearly 32% of shares outstanding to just over 16%) over the past five quarters, new institutions have more than filled their vacant positions in Q1 2012. Institutional ownership rose to 62% from 57%, which ended a two year slide in the relative proportion of institutional ownership. Note that much of this slide could have been due to profit-taking, as the stock has earned a 65.6% cumulative total return over two years.

In Q1 2012, the largest buyer of Two Harbors was SAB Capital Management, which increased its 1.2 million shares by 9.7 million over the quarter. This increase in position gives SAB Capital a 5.1% stake in the company and positions it as the number three institutional shareholder behind Fidelity Management & Research Co. (5.5%) and Blackrock Fund Advisors (6.1%). But given SAB Capital’s high portfolio turnover, it will be interesting to see how long this stake is held.

Top-10 Financial Centers: Country, Sector, & Security Investment
The ten largest money management countries (as denoted by an aggregate of the equity assets of the country’s fifty largest institutions) heavily decreased their exposure to the United States and Japan in Q1 2012. Driving the decline in US exposure were sales made by the largest US managers, but the other nine nations reduced US exposure as well. However, US institutions weren’t the only ones pessimistic about their domestic prospects. With the exception of the UK, Canada, China, and the Netherlands, all of the country aggregates experienced a decrease in exposure to their own markets. On the other hand, the UK experienced the largest increase in exposure from the top ten country aggregates. Driving this trend were large increases in the portfolio’s holdings of UK companies HSBC Holdings and BG Group.

The ten largest money management countries only collectively increased their exposure to one industry—Energy. This increase, however, was heavily outweighed by declines in each of the other nine sectors. With the exception of the UK and the US (which decreased exposure to each of the ten sectors in Q1 2012), the remaining eight country aggregates experienced increases in their dollar-value exposure to the Energy sector. The greatest loss in the portfolio’s value, on the other hand, came from the Consumer Discretionary and Consumer Staples sectors.

Read the entire analysis in this quarter's edition of FactSet Institutional Ownership.

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All of the data used to compile FactSet Institutional Ownership is available in the FactSet workstation. FactSet users, click here to access the templates driving this report.

Facebook shatters trading records in IPO

FactSet Research Systems Inc. — 2012-05-22T12:02:48Z

Facebook’s debut may not have blown the doors off the market in the traditional sense—its stock touched $45 (+18.4% above the offering price $38) and closed at $38.23 (+0.6%)—but its trading volume was unprecedented.

On its opening day, Facebook’s volume was the highest of any other IPO since at least 2000 (581 million shares). This number multiplied by Facebook’s volume-weighted average price ($40.04) indicates that approximately $23,249 million was traded in Facebook on Friday. For comparison, General Motors’ 2010 IPO had the second-highest value-weighted volume at $16,041 million (with a volume of at 458 million shares) followed by Visa with $10,338 million (on 177 million in volume).

In addition, the cumulative volume of Facebook was greater than any other US equity on Friday (Bank of America was second with 224 million shares traded), and the dollars traded in Facebook also led the markets (Apple was second at $14,002 million). This is an incredible feat as Apple has been the most traded stock by value in the S&P 500 for 250 of the past 254 trading days (or 98.4% of the trailing year). Furthermore, over a one year timeframe, Apple’s average daily traded volume multiplied by its volumeweighted average price ($8,319 billion) is more than four times the value of the second most traded US equity (Bank of America at $2,019 billion), and larger than the next four most traded stocks combined (which includes Bank of America).

Apple’s elevated trading on Friday was evidence that Facebook didn’t trade in a vacuum. Facebook’s debut appears to have boosted the trading of a number of stocks, including Apple and Google. On Friday, 8 of the 2,526 constituents in the NASDAQ Composite hit their one-year high for volume and 1,002 had volume greater than their one-year daily average. In the S&P 500, 272 companies had volumes greater than their one-year daily average, including Autodesk and NASDAQ OMX. In fact, Friday marked the one-year high for volume in NASDAQ OMX by a wide margin (10.7 million shares versus 7.4 million on November 1, 2011).

It will be interesting to see how Facebook effects the trading of related securities in the long-term,
especially leading up to its likely inclusion in major market indices.

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Facebook would be a top 25 Market Cap company in the S&P 500 based on offer price

FactSet Research Systems Inc. — 2012-05-19T12:02:29Z

Facebook is not a member of the S&P 500 index at this time. However, it is interesting to note that the company would rank as the 23rd largest company in the index by market capitalization ($104 billion) based on the offering price of $38 and the projected number of shares outstanding after the IPO.

Looking specifically at Information Technology companies in the S&P 500, Facebook would be the seventh largest Information Technology company in the index by market capitalization, behind Apple, Microsoft, IBM, Google, Intel and Oracle.

For more information on expected earnings for Facebook, please see our Market Insight report “Facebook EPS Growth: Large Cap Tech or Social Media Stock” here: www.factset.com/marketinsight.

Overall, 473 companies have reported earnings for Q1 2012 to date. Of these 473 companies, 72% have reported actual EPS above the mean EPS estimate. This percentage is consistent with the average percentage of upside earnings surprises reported over the past four quarters (72%). In terms of revenues, 65% of companies have reported actual sales above estimated sales, which is slightly above the average of 63% over the past four quarters.

There was a slight uptick in the blended earnings growth rate during the week to 7.3% from 7.2%. Upside earnings surprises from Wal-Mart Stores and Target were the main contributors to the small improvement. Apple is still the largest contributor to earnings growth for the index. Excluding Apple, the blended earnings growth rate for Q1 2012 falls to 5.0% from 7.3%.

Seven of the ten sectors are reporting earnings growth for the quarter, led by the Financials (27.6%), Industrials (14.4%) and Information Technology (11.1%) sectors. Nine of the ten sectors are reporting revenue growth for the quarter. Companies have been citing the negative impact of higher costs and less favorable foreign exchange rates on their top and bottom lines in their earnings releases.

Looking ahead, analysts have reduced earnings estimates for the remaining three quarters of 2012 during the past few weeks. However, they are still projecting double-digit earnings growth (15.2%) in Q4 2012.

The peak weeks of the Q1 2012 earnings season are now finished. During the upcoming week, 14 companies in the S&P 500 and final company in the Dow 30 (Hewlett-Packard) are scheduled to report earnings results.

Read more in this week's edition of FactSet Earnings Insight.

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All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.

Facebook EPS Growth: Large cap tech or social media stock?

FactSet Research Systems Inc. — 2012-05-18T12:01:25Z

At the end of the day tomorrow, Facebook's market cap could be one of the largest in the tech sector. Many companies with large market capitalizations tend to be mature companies with moderate but steady earnings growth.

However, Facebook is typically classified as a “social media” company, similar to other internet-based companies such as LinkedIn and Groupon. These companies tend to have much smaller market capitalizations relative to the more mature technology companies, but often have much higher projected levels of earnings growth.

Given these views, do analysts project Facebook to have earnings growth similar to large cap tech or a high-flying social media company?

Using FactSet Estimates to analyze earnings and sales projections, it appears that Facebook is expected to have higher annual EPS growth than other large-cap tech companies, but lower than other social media companies.

Review the complete analysis in today's Market Insight report.

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M&A: Reverse termination fees are now less common, but better

FactSet Research Systems Inc. — 2012-05-17T12:02:17Z

With uncertainty being the rule in the financial markets after the 2007 credit crisis, fewer agreed mergers have come to market with reverse termination fee provisions, but it seems that those fee provisions are of better quality. In one of the stand-out deals of 2009 – the $4 billion buyout of IMS Health by co-investors TPG Inc. and CPP Investment Board – the reverse termination fee payable was $275 million, or nearly 6.9% of the transaction value. By comparison, the maximum termination fee payable by IMS in that deal was only $115 million, or 2.9% of the value.

Could it have been an oversight or deal design flaw that left the TPG/CPP investor group on the hook for a reverse termination fee amount twice that of the target company? The below chart indicates that the IMS/Investor Group transaction was one among the 35 transactions, or about 7.4% of the reverse termination fee universe since 2007, in which the termination fee amount was between 6% and 7% of transaction value. Even more striking is that 61 announced transactions, or about 12.9% of the reverse fee deals, had included a reverse termination fee equivalent to 8% or more of the transaction value – not an insignificant amount by any measure.

What’s more, this chart shows that transactions having a reverse fee of between 3% and 4% have dominated this space, with 131 transactions, or almost 28% of the market. Casting a wider net, to include the 2-3% group, the transactions with a reverse fee of between 2% and 4% together cornered 213 deals, or 45% of the reverse termination fee group. Then, widening the scope to include all deals with reverse termination fees payable of up to 4% of transaction value, the result is almost 53% of deals. The remaining 47% of these transactions had a reverse fee of 4.01% and higher. So we are left to ask: did the credit crisis have anything to do with improving the quality of reverse termination fee provisions?

There may be a strong correlation. In 2007, the beginning stage of the crisis, 73.1% of the 167 agreed deals had a reverse fee of 4% or less; only 26.9% of deals had a reverse fee greater than 4% (see chart below).

As the credit crunch continued to the succeeding years, the percentage of deals with a reverse fee of greater than 4% increased significantly. In 2009, for example, only 35.2% of these deals had provisioned for a reverse fee of less than 4% of transaction value; however, nearly 65% provided a reverse fee payable of greater than 4% of value. A comparable reverse fee pattern also followed into 2010 and 2011, while the public M&A market was still tepid and deal volumes were down. However, from the viewpoint of target companies, reverse termination fee provisions came into play during this sour M&A market as a means for providing some measure of insurance against an easy acquirer walkaway.

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Q1 earnings growth for S&P 500 almost equal to estimate on October 1

FactSet Research Systems Inc. — 2012-05-12T12:02:06Z

The blended earnings growth rate for the S&P 500 for Q1 2012 stands at 7.3%, well above expectations at the end of the first quarter (0.1%) and the start of the first quarter (3.0%). In fact, this growth rate is nearly equal to expectations at the start of the fourth quarter (8.0%), before analysts began to significantly lower earnings estimates for the quarter.

Overall, 453 companies have reported earnings for Q1 2012 to date. Of these 453 companies, 72% have reported actual EPS above the mean EPS estimate. This percentage is consistent with the average percentage of upside earnings surprises reported over the past four quarters (72%). In terms of revenues, 65% of companies have reported actual sales above estimated sales, which is slightly above the average of 63% over the past four quarters.

There was a slight uptick in the blended earnings growth rate during the week to 7.3% from 7.0%. Upside earnings surprises from companies in the Consumer Discretionary and Financials sectors were the main contributors to the small improvement. Apple is still the largest contributor to earnings growth for the index. Excluding Apple, the blended earnings growth rate for Q1 2012 falls to 4.9% from 7.3%.

Seven of the ten sectors are reporting earnings growth for the quarter, led by the Financials (27.6%), Industrials (14.2%) and Information Technology (11.5%) sectors. Nine of the ten sectors are reporting revenue growth for the quarter. Companies have been citing the negative impact of higher costs and less favorable foreign exchange rates on their top and bottom lines in their earnings releases.

Looking ahead, analysts began reducing earnings estimates for the remaining three quarters of 2012 during the past few weeks. However, they are still projecting double-digit earnings growth (15.4%) in Q4 2012.

The peak weeks of the Q1 2012 earnings season are now finished. During the upcoming week, 21 companies in the S&P 500 and two companies in the Dow 30 (Home Depot and Wal-Mart Stores) are scheduled to report earnings results.

Read more in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.

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Eurozone overall unemployment number masks underlying jobless rates

FactSet Research Systems Inc. — 2012-05-12T12:04:02Z

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While the big economic story in the United States is anemic job growth and the too-slow decline in the unemployment rate, European nations are facing an entirely different set of challenges. The ongoing debt crisis and prescribed fiscal austerity in Europe has pushed a number of countries back into recession or teetering on the edge of one, and as a result, across the region there has been a surge in unemployment.

In March, the overall unemployment rate for the Eurozone came in at 10.9%, up a full percentage point from a year earlier. However, this aggregate number masks a wide range of jobless rates among the member countries, from a high of 24.4% in Spain to a low of 6% in Luxembourg. (In Austria, the ILO unemployment rate is 4.3%; for this analysis we are using the national definition.)

What does this wide disparity in unemployment rates mean? One of the key provisions in the creation of the European Union was the opening of country borders to labor migration. Anecdotal evidence indicates that workers are moving from high unemployment countries to low unemployment countries (the UK is a popular destination due to the upcoming summer Olympic games). However, labor migration between countries in Europe is not as simple as moving between states in the U.S. due to language differences and local hiring laws.

Many countries in Europe have strict labor protection laws that make it difficult and expensive to lay off workers, thus effectively freezing the local labor market. These laws make many companies reluctant to hire until there are clear signs of economic growth. Spain’s government has been pushing for liberalization of some of its tight labor market laws, and although it was not mentioned during the recent French presidential elections, France must also contend with its own labor market rigidities and generous entitlement benefits as its jobless rate approaches 10%.

Clients: Launch this chart in FactSet

Six of the 17 Eurozone countries are technically in recession, defined as two or more consecutive quarters of negative GDP growth. These countries are Cyprus, Ireland, Italy, Portugal, Slovenia, and Spain.

Clients: Launch this chart in FactSet

As a result of economic slowdown, these governments are being hit with higher social benefit costs and lower tax revenue from both businesses and individuals. As the full force of fiscal austerity continues to batter Europe, it may be necessary to step back and ask whether plunging everyone deeper into recession is really the best medicine.

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Skepticism yields positive outcomes for this year’s Best on the Street

FactSet Research Systems Inc. — 2012-05-15T15:40:33Z

A touch of skepticism went a long way for the winning analysts of The Wall Street Journal’s Best on the Street Analysts Survey. The Best on the Street identifies the top three equity securities analysts in each of 44 industries, based on an objective, quantitative evaluation of their stock-picking performance. The 132 award winners were drawn from over 2,000 analysts who are based in U.S., Europe, and Asia and who follow U.S.-listed stocks, meet the survey’s requirements, and qualify to have their research analyzed in detail.

The top ranked analyst for each industry was interviewed by The Wall Street Journal and received a special mention in the print edition, which was released on May 10th. In addition to recognition in The Journal, the winners are also flagged within the FactSet workstation, so FactSet clients, including top buy-side firms, can see who stands out from the pack as “the Best on the Street.”

FactSet clients will be able to view this year’s winners as well as previous year’s winners within the broker outlook report. The broker outlook report provides an overview of broker research and information including last update date, targets and ratings, consensus estimates, guidance, actual data, as well as contact information (where available).

To learn more about FactSet Estimates and our partnership with The Wall Street Journal, visit www.factset.com/wsj.

To learn more about the Broker Outlook report visit Online Assistant Page ID 15175

Final peak week of earnings season sees an unusually low number of S&P 500 companies reporting earnings above expectations

FactSet Research Systems Inc. — 2012-05-08T12:02:40Z

This past week marked the final “peak” week of the Q1 2012 earnings season, and an unusually low number of companies reported earnings above analyst expectations during the week. As a result, the overall percentage of companies reporting upside earnings surprises in the index fell from 77% last week to 72% this week (with 403 companies reporting). This percentage of upside surprises is consistent with the average of the past four quarters (72%). In terms of revenues, 67% of companies have reported actual sales above estimated sales, which is above the average of 63% over the past four quarters.

Although the percentage of upside surprises was smaller than normal during the week, there was still a slight uptick in the blended earnings growth rate to 6.4% from 6.2%. Upside earnings surprises from companies in the Consumer Discretionary and Financials sectors were mostly offset by downside earnings surprises from companies in the Energy and Utilities sectors. Apple is still the largest contributor to earnings growth for the index. Excluding Apple, the blended earnings growth rate for Q1 2012 falls to 4.1% from 6.4%.

Overall, seven of the ten sectors are reporting earnings growth for the quarter, led by the Financials (24.7%), Industrials (14.2%) and Information Technology (11.5%) sectors. All ten sectors are reporting revenue growth for the quarter. Companies have been citing the negative impact of higher costs and less favorable foreign exchange rates on their top and bottom lines in their earnings releases.

Looking ahead, analysts began reducing earnings estimates for the remaining three quarters of 2012 during the week. However, they are still projecting double-digit earnings growth (15.6%) in Q4 2012.

The peak weeks of the Q1 2012 earnings season are now finished. During the upcoming week, 27 companies in the S&P 500 and two companies in the Dow 30 (Walt Disney and Cisco Systems) are scheduled to report earnings results.

Read more in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.

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Small Caps - No Small Oversight

FactSet Research Systems Inc. — 2012-05-05T12:02:07Z

FactSet is pleased to provide the latest research paper, Small Caps - No Small Oversight, from our long-term partner, MSCI.

From May 7 through September 7, 2012, MSCI is offering free trial access to the MSCI Small Cap modules through FactSet.

Trials last for 30 days. Trial participants can access a broad range of index- and security-level data for the MSCI Small Cap Indices. In addition, these data points are fully integrated into FactSet applications such as Portfolio Analysis and SPAR.

Small Caps - No Small Oversight

Summary: Many investors recognize that their reference universe should encompass large, mid and small caps, and furthermore accept the investment belief that smaller companies should earn a risk premium over larger ones. Nevertheless, in practice, most of these investors underweight the small cap segment. Institutional investors - particularly in Europe and Asia - tend to have limited small cap representation, even within their own markets.

MSCI reviews various aspects of this puzzle and argue that omitting small caps is in fact a significant active decision which many investors may be making unintentionally. Excluding small caps represents an active decision to ignore up to 14% of the universe and amounts to a negative view on the small cap premium. This active decision would have forfeited 60 bps of annual performance over the last decade and could have consumed a substantial part of an asset owner’s risk budget as well, in the range of 50% to 75%.

Why do so many institutional investors exclude global small caps in their equity universe? This paper discusses some of the investment beliefs and perceptions that may underlie this exclusion and also addresses small cap implementation issues such as free float availability, liquidity, and trading costs.

The paper is structured as follows. In Section 1, the report looks at the performance of small cap equities historically and provide an overview of the well-known small cap premium. Section 2 discusses important differences between large/mid caps and small caps around the world and why institutions who are not fully participating in global small caps are effectively making a significant active decision. Section 3 considers small cap accessibility issues including liquidity and trading costs. Finally, in Section 4, MSCI summarizes the current product landscape for small cap investors.

Authors: BENDER Jennifer - MSCI, BRIAND Remy - MSCI, FACHINOTTI Giacomo - MSCI, RAMACHANDRAN Sivananth - MSCI

Download the Research Paper

S&P 500 bottom-up target price increased for fourth consecutive month while ratings remain unchanged

FactSet Research Systems Inc. — 2012-05-02T12:02:37Z

The percentage of Buy, Hold, and Sell ratings for the index has remained unchanged since the end of February. The percentage of Buy ratings at the end of the past three months (51%) is the lowest percentage since the end of March 2011 (51%), which was one month prior to the start of a 17% decline in the price of the S&P 500 from April 30 through September 30.

Overall, analysts continue to be most optimistic about the Energy sector and least optimistic about the Utilities sector, based on percentages of Buy ratings. The Energy sector had the highest percentage of Buy ratings (63%) for the twelfth consecutive month. Over the past twelve months, the average percentage of Buy ratings for the Energy sector has been 64%, which is the highest of all ten sectors. On the other hand, the Utilities sector continued to have the lowest percentage of Buy ratings (31%) of any sector. Over the last twelve months, the average percentage of Buy ratings for the Utilities sector has been 34%, which is the lowest average of all twelve sectors.

Target price estimates from industry analysts rose again during the month. The bottom-up target price (compiled from company-level estimates from industry analysts) increased slightly for the fourth consecutive month, to 1567.74 from 1532.95. At the company level, 336 companies recorded an increase in their mean target price, 36 companies recorded no change in their mean target price, and 128 companies recorded a decline in their mean target price. The 1567.74 bottoms-up target price for the end of April is the highest month-end bottom-up target price recorded in the past 20 months. The previous high was 1548.02, recorded at the end of July 2011.

At the sector-level, the Energy sector has the largest upside difference between the bottom-up target price and the closing price (+19.4%), while the Telecom Services sector has the smallest upside difference between the bottoms-up target price and the closing price (+2.4%).

Launch the complete FactSet Targets & Ratings report for May 2012.

All of the data used to compile FactSet Targets & Ratings is available in the FactSet workstation.

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A new factor for alpha generation, risk management, and market sentiment

FactSet Research Systems Inc. — 2012-05-01T12:01:00Z

In its latest research report, Portfolios Under Construction: Standing out from the crowd, Deutsche Bank has proposed new metrics to measure factor crowdedness based on securities lending data from Data Explorers, high frequency data and ownership data.

FactSet clients who subscribe to Data Explorers data can monitor the Deutsche Bank crowdedness factor, as in the example below:

Utilization can be used as a measure of factor crowdedness by deciling common factors and looking at the levels of utilization across each decile
EBITDA to Price shows relatively high utilization in decile 10 and low utilization in decile 1, suggesting it is a popular factor for long/short investors
There is a similar trend for market cap and three-month return, but earnings growth does not seem to be a popular factor, as deciles 1 and 10 have similar utilization levels

Data is for constituents of the Russell 1000 as of April 23, 2012. Source: FactSet, Data Explorers

While the link between factor crowdedness and performance is not clear-cut, evidence suggests that long-run factor crowdedness is bad for performance. However, Deutsche Bank finds some counter-intuitive results for short-term performance you may not expect.

To request a copy of the Deutsche Bank research paper, email marketing@dataexplorers.com.

Upside surprise in iPhone sales drives upside sales surprise for Apple

FactSet Research Systems Inc. — 2012-04-28T12:02:27Z

This past week marked the second “peak” week of the Q1 2012 earnings season, and an unusually high number of companies continued to report earnings above analyst expectations. Of the 268 companies that have announced results to date, 78% have reported actual EPS above the mean EPS estimate, which is above the 72% average of the past four quarters. In terms of revenues, 68% of companies have reported actual sales above estimated sales, which is also above the average of 63% over the past four quarters.

However, one upside earnings surprise was mainly responsible for the improvement in the earnings growth rate this past week: Apple. The company reported earnings that were 22% above expectations and revenues that were 6% above expectations, primarily due to better than expected sales of IPhones. As a result, the blended earnings growth rate of for the S&P 500 increased to 5.9% from 4.2% during the week. Apple is the largest contributor to earnings growth for the index. If Apple is excluded, the earnings growth rate falls to 3.5% from 5.9%.

It is interesting to note that for Q2 2012, the current mean estimate for sales for the IPhone product segment is $19.4 billion, below the $22.7 billion reported for Q1 2012. Overall sales for Apple are also projected to be lower on a sequential basis in Q2 2012. The current mean estimate for overall sales in Q2 2012 is $38.0 billion, relative to the actual of $39.2 billion reported for Q1 2012.

Overall, five of the ten sectors are reporting earnings growth for the quarter, led by the Financials (23.5%), Industrials (14.4%) and Information Technology (10.7%) sectors. All ten sectors are reporting revenue growth for the quarter. Companies have been citing the negative impact of higher costs and less favorable foreign exchange rates on their top and bottom lines in their earnings releases. However, analysts seem slightly more optimistic about the remainder of the year. As opposed to the last two quarters (when estimates were reduced), there has been a slight uptick in estimated earnings growth rates for the next three quarters over the past four weeks.

The upcoming week marks the final “peak” week of the Q1 2012 earnings season, as 116 companies in the S&P 500 and two companies in the Dow 30 (Pfizer and Kraft Foods) are scheduled to report earnings results.

Read more in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.

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S&P 500 Financials sector growth continues to benefit from lower provisions for credit losses

FactSet Research Systems Inc. — 2012-04-21T12:02:02Z

The past week marked the first “peak” week of the Q1 2012 earnings season, and an unusually high number of companies reported earnings above analyst expectations. Of the 106 companies that have announced results to date, 83% have reported actual EPS above the mean EPS estimate, which is above the 72% average of the past four quarters. The current record (over the past three years) is 81%, set in Q1 2010.

As a result of this strong performance relative to estimates, the blended earnings growth rate of for the S&P 500 improved to 2.2% from 1.0% during the week. Upside earnings surprises from companies in the Financials sector were mainly responsible for the increase in the growth rate. However, while earnings growth for companies in this sector increased during the week (to 12.8% from 9.7%), revenue growth remained flat (2.3%). It appears that companies in this sector are still seeing a benefit to the bottom line from lower provisions for loan losses in Q1 2012. The median change in provisions for loan losses for the 25 companies in the Financials sector with estimates for this metric was -31.1%.

If 2.2% is the final earnings growth rate for the quarter, it will mark the tenth consecutive quarter of earnings growth for the index. However, seven of the ten sectors are seeing a decline in earnings. The only three sectors reporting earnings growth are the Financials (12.8%), Industrials (8.7%), and Information Technology (4.8%) sectors. The blended revenue growth stands at 4.6%. All ten sectors are reporting revenue growth for the quarter.

Three key themes to watch this earnings season are the impact of Apple, higher costs, and slower global GDP growth. Apple is again expected to be the largest contributor to earnings growth for the S&P 500 for the quarter. If Apple is excluded, the projected earnings growth rate for the index would fall to 0.7%. In terms of costs, the number of companies in the index expected to see sales increase and earnings decrease is 103. This marks the highest number of companies recording this difference since Q3 2008. The blended net profit margin (excluding the Financials sector) is 8.5%, which would be the lowest number for the index since Q4 2010. In terms of GDP growth, companies that have reported to date have cited solid results in emerging markets. However, F/X rates have been a headwind rather than a tailwind to the bottom line for a number of companies.

The upcoming week marks the second “peak” week of the Q1 2012 earnings season, as 171 companies in the S&P 500 and nine companies in the Dow 30 are scheduled to report earnings results.

Read more in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.

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Wall Street Journal Best On The Street 2011: Bear calls are best

FactSet Research Systems Inc. — 2012-04-20T12:34:50Z

FactSet and The Wall Street Journal have teamed up again for the Best on the Street Analysts Survey. The survey is based on a quantitative evaluation of performance using the all-inclusive FactSet Estimates database to calculate rankings.

Today, The Wall Street Journal released the preliminary list of the top three stock pickers in each industry. Our Market Insight report examines the trends amongst the winners.

In general, the winning analysts in this year’s survey:

Issued more Sell ratings on stocks than the non-winning analysts overall
Increased their bearish calls ahead of the market downturn in May
Covered a smaller number of stocks within their industry than non-winning analysts

Launch the Market Insight report to read the full analysis.

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Early results from this year's say on pay voting

FactSet Research Systems Inc. — 2012-04-19T12:01:19Z

With news that Citigroup Inc. shareholders voted down the company's pay practices at its annual meeting yesterday, we examine results from say on pay votes so far this year. (As a reminder, Section 951 of the Dodd-Frank Act requires public companies with meetings on or after 1-21-2011 to provide a separate non-binding say on pay vote to approve the compensation of executive officers as disclosed in the company's proxy statement at least once every three years.)

It's very early in the season, but so far predictions of increased scrutiny of pay practices have yet to materialize. With 200 companies in SharkRepellent's coverage universe disclosing their say on pay results so far this year, Citigroup is only the fourth to have its say on pay vote rejected by shareholders. At the same point in 2011, six companies had failed say on pay votes. However, overall shareholder support is slightly down: an average of 90% of votes cast supported pay practices in 2011 versus 88% in favor this year.

A consensus appears to be forming regarding say on pay frequency votes. Say on pay frequency proposals provide shareholders a separate non-binding vote to choose the frequency with which to hold the say on pay vote required by the Act (annual, biennial, or triennial basis). This frequency vote must be held at least once every six years. For the subset of companies holding a say on pay frequency vote in 2012 which includes those that held their annual meeting in 2011 before the new rules took effect, three-fourths are recommending an annual vote. In 2011, only 55% of companies recommended shareholders vote for an annual frequency. Boards recommending a triennial vote fell from 40% in 2011 to only 23% this year. In 2011, shareholders overwhelmingly supported an annual vote (the annual vote frequency received the most votes at nearly 80% of companies.) It appears that boards are adhering to shareholder preference on this issue.

FactSet's corporate governance database, SharkRepellent, was used to compile the data for this article.

2012 fails, so far, to bring M&A rebound analysts predicted

FactSet Research Systems Inc. — 2012-04-19T12:02:34Z

After 2011 failed to be the rebound year M&A dealmakers expected, hopes turned to 2012 for the awaited uptick. Now that the first quarter of 2012 is behind us, how have the numbers compared? At first glance, things aren’t looking good.

The value of United States M&A activity in the first quarter of 2012 stood at $152.5 billion, a 32% decrease from comparable 2011 levels. By deal volume, M&A activity followed suit and fell 14.5% compared to last year, totaling 2,152 announced deals. Compared to the fourth quarter of 2011, the value and volume of announced mergers and acquisitions declined in both areas, depicting the fourth consecutive quarterly decline in the M&A market. However, as activity has noticeably declined, the mood in the marketplace does not compare to the financial downturn from 2008. Instead, a cautious optimism keeps dealmakers hopeful that a rebound may still occur.

While markets in the U.S. have continued to decline, global markets have also succumbed to downward pressures. For the first quarter of 2011, both European and Asian markets have also declined, although deals in Asia have dipped only 2.8% in volume, while Europe, fresh off its debt crisis, plummeted 20.2% on the year in volume. Dollar values in these regions saw an increase in the European markets, with $179.6 billion in activity compared to $164.4 billion in 2011, while deals in Asia declined, coming in at $80.3 billion in 2012, compared to the $106.2 billion spent for the same period in 2011. Only activity in the Middle East has picked up compared to the same period in 2011, with 59 transactions, up 52 in 2011. Aggregate values for this region also spiked, increasing to $5.7 billion from the $1.4 billion in deals in 2011.

Private equity transactions for the quarter also followed the activity set by the overall market, posting aggregate totals that trailed the same period in 2011 as well as each quarter in 2011. Volume figures totaled 342 transactions, compared to the 424 transactions from the first quarter in 2011, while value figures were at $32.9 billion compared to the $35.5 billion posted for the same period in 2011. Notable transactions for the year included Apollo Global Management teaming with Riverstone Holdings to acquire the exploration and production business of El Paso Corp for $7.2 billion; Insight Venture Partners $1.9 billion purchase of Quest Software; and Vista Equity Partners deal to acquire Misys PLC for $1.8 billion.

With 61 transactions announced to date, the Computer Software ‒ Supplies and Equipment industry was the most attractive sector to such firms, followed by deals in the Miscellaneous Services sector with 28 transactions and Wholesale, Distribution and Brokerage and Investment and Management Consulting with 25 deals a piece. For aggregate values, Energy Services attracted private equity buyers to $7.5 billion in deals, followed by $4.7 billion in deals in the Communications industry and $4.7 billion in deals in the Computer Software ‒ Supplies and Equipment industry. It’s well known that U.S. private equity players have held large cash reserves over the last two years and are increasingly eager to enter the M&A market. Signs of a rebound will be noted when such participants reenter the market. As the economy slowly recovers, opportunities to find companies requiring growth capital are bound to be plentiful.

Deals from the middle market area, an area where transactions are capped at $500 million, have been slow to recover since the financial crisis in 2008. Always the driving force behind M&A markets, middle market deals have faced obstacles such as securing financing for transactions (as banks are reluctant to lend), cost saving strategies being put to use as companies instead choose to focus on existing operations and strengthening their balance sheets, and overseas volatility in financial markets. Through the first quarter, deal flow totaled 2,092 transactions in 2012, compared to the 2,400 transactions announced in the same period prior. Value figures also suffered, with $35.1 billion in deals announced for the recent quarter, as opposed to the $46.9 billion in deals in 2011. Overall, first quarter numbers trail each quarter in both volume and value totals for all of 2011.

In taking a closer look at pricing multiples for transactions, signs points to buyers waiting for more attractive deal valuations before pursuing a deal. During the third quarter of 2011, a point when deal activity noticeably declined, EBITDA multiples across all deals peaked at 12.3x, their highest levels since the 2008. Valuations dropped to 11.9x during the fourth quarter of 2011, and current levels now indicate a price paid of 10.6x, which are more in line of prices paid at the rise of activity in 2011. With concerns over overseas debt still in the picture, as well as our own domestic situation in 2013, investors may be hesitant to deploy their capital without knowing a resolution over the financial markets is in place. Certainly attractive pricing multiples will lure buyers to return to the market, but for the volume of M&A deals to rise significantly, sellers, and particularly shareholders, will need to be on the same page as buyers.

As we move into the second quarter and continue through the rest of the year, the same corporate strategies that are depressing markets can be applied to drive a turnaround. The perennial M&A drivers of economies of scale, growth through acquisition, improving profitability, and an indication of the presidential election will likely to lead to more M&A activity. In addition, sellers have been reluctant to lower their valuations from the highs of the boom years up to 2007 and early 2008, despite deepening global economic difficulties. In contrast, buyers have immediately discounted valuations, resulting in a mismatch that has kept deal flow static.

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Strong start for Earnings Season - Is market optimism due to expected rebound in earnings growth?

FactSet Research Systems Inc. — 2012-04-14T12:01:05Z

A number of high profile companies (Alcoa, Google, JPMorgan Chase, and Wells Fargo) reported earnings above estimates to kick off a strong start to the Q1 2012 earnings season. Overall, 32 companies in the index have announced results to date. Of these 32 companies, 75% have reported actual EPS above the mean EPS estimate, which is slightly above the 72% average of the past four quarters. In terms of revenue, 84% of companies announced sales that surpassed estimates, well above the 63% average of the prior four quarters.

The blended earnings growth rate of 0.0% is slightly higher than last week’s estimate of -0.1%. If this is the final growth rate for the quarter, it will mark the end of the streak of consecutive quarters of earnings growth for the index at nine. Seven of the ten sectors are predicted to see a decline in earnings, led by the Materials (-13.2%) and Telecom Services (-9.8%) sectors. The blended revenue growth stands at 4.0%. All ten sectors are predicted to see revenue growth for the quarter.

Although earnings estimates for Q1 have fallen since the start of the year, the S&P 500 is up about 10%. One possible reason for this increase is that the market is looking ahead to earnings expectations for late 2012 and early 2013, when analysts are projecting a return to double-digit earnings growth for the index. Unlike earnings estimates for the first three quarters of 2012, there has been relatively little change in the growth rate expectations for Q4 2012, Q1 2013 and Q2 2013 over the past six months. The markets will be watching for any revisions to these expectations during the Q1 2012 earnings season.

Three other key themes to watch this earnings season are the impact of Apple, higher costs, and slower global GDP growth. Apple is again expected to be the largest contributor to earnings growth for the S&P 500 for the quarter. If Apple is excluded, the projected earnings growth rate for the index would fall to -1.5%. In terms of costs, the number of companies in the index expected to see sales increase and earnings decrease is 101. This marks the highest number of companies recording this difference in the past nine quarters. The estimated net profit margin (excluding the Financials sector) is predicted to be 8.4%, which would be the lowest number for the index since Q1 2010. In terms of GDP growth, slower economic growth in emerging markets and Europe is another cause of the lower expectations for earnings growth in Q1 2012. F/X rates are expected to be a headwind rather than a tailwind to the bottom line for a number of companies.

The upcoming week marks the start of the “peak” weeks of the Q1 2012 earnings season, as 84 companies in the S&P 500 and 12 companies in the Dow 30 are scheduled to report earnings results.

Read more in this week's edition of FactSet Earnings Insight.

All of the data used to compile FactSet Earnings Insight is available in the FactSet workstation.

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What is the impact of tightened oil sanctions on Iran?

FactSet Research Systems Inc. — 2012-04-12T19:37:51Z

On March 30, the U.S. government announced that world oil supplies could withstand a reduction of Iranian oil on global markets, opening the door for tighter oil sanctions on Iran. A law originally signed in December 2011 required U.S. President Obama to evaluate global oil supplies before March 31, 2012 before placing financial sanctions on countries that don’t significantly reduce their purchases of oil from Iran. Countries have until the end of June to show that they have reduced their imports of Iranian oil. In 2010, Iran was the world’s third largest exporter of crude oil after Saudi Arabia and Russia, accounting for roughly 5% of global production. What do these increased sanctions mean for global oil markets, particularly the countries that purchase oil from Iran?

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In recent years, Iran’s exports have been steadily shifting away from the U.S. and Europe and toward emerging Asia. According to the Energy Information Administration (EIA), in 2010 China received 20% of Iran’s oil exports, closely followed by Japan (17%) and India (16%). Iran is a significant source of China’s oil, but the Middle East as a whole accounts for nearly 50% of China’s oil imports. Saudi Arabia is China’s most important source for crude oil, and it is Saudi Arabia that is expected to fill in the gap in world oil supplies.

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But whether Saudi Arabia can keep up with the ever-growing demand for oil in China has yet to be seen. Chinese oil consumption has grown at an average annual rate of 7.1% over the past 20 years. China was a net exporter of crude oil until the early 1990s; in 2009, China passed Japan to become the second largest net importer of crude oil after the United States. In 2011, the EIA estimates that China imported approximately 56% of its crude oil; by 2035, the agency expects that figure to rise to 72%.

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Even an anticipated easing in China’s economic growth may not change anything. The Chinese government announced last month that it was projecting a 2012 GDP growth rate of 7.5%, which would be the slowest rate of growth in more than 20 years; however, this is still a very strong rate of growth for the world’s second largest economy. This dip hardly signals a real slowdown in China’s demand for oil, but it could provide just enough easing in demand to smooth the move away from Iranian oil. The other factor that could help dampen global demand is the ongoing European financial crisis.

In addition to encouraging more production from other oil exporters (especially Saudi Arabia), U.S. and European government leaders have also been discussing the possibility of using their own oil reserves to cushion the impact of global supply disruptions. However, it’s not just Iran that is weighing on global oil markets. With political turmoil in Sudan, Libya, and Syria also threatening global supplies, it appears that high oil prices are here to stay, even as world leaders work to come up with new sources of oil.

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