20160510-高盛-Portfolio_Manager_Toolkit_Reality_Check__Value_vs_Value_Trap,_GAAP_vs_Non-GAAP_17页_911kb

Portfolio Manager Toolkit Summary

Core Content

The Portfolio Manager Toolkit report from Goldman Sachs provides insights into current market trends and investment strategies, focusing on the value investing style and the use of non-GAAP earnings measures. The report discusses how companies are increasingly excluding items from reported earnings, leading to a significant gap between GAAP and non-GAAP EPS, and highlights the implications of this trend on investment decisions.

Main Points

• GAAP vs Non-GAAP Earnings Gap:

  • The gap between GAAP and non-GAAP EPS has widened, with non-GAAP EPS exceeding GAAP by 26% in 2015, up from 14% in 2014 and 8% in 2010.
  • The report estimates that over $400 bn in special items are excluded from non-GAAP earnings, a 70% increase YoY.
  • Non-GAAP results were more favorable than GAAP for 87% of companies in 2015, with some sectors like Software and Health Care showing significant differences.
  • The report identifies 50 "Usual Suspects" where non-GAAP EPS has consistently exceeded GAAP by over 75% for the past three years.

• Non-GAAP Adjustments:

  • Asset impairments have surged to $170 bn in 2015, driven largely by the Energy sector due to falling crude prices.
  • Amortization of intangible assets has increased to $80 bn in 2015, with Health Care and TMT sectors contributing 75% of this.
  • Goodwill impairments rose to $27 bn in 2015, representing a 100% increase YoY, reflecting poor capital allocation decisions.
  • Restructuring charges and stock-based compensation are also common adjustments, though they can be misleading as they are not always reflective of cash expenses.

• Investment Strategies:

  • Payback Period Model: Evaluates how quickly a company can buy itself using unlevered Free Cash Flow (uFCF), suggesting that companies like AMAT, AVGO, ABBV, and RL could potentially buy themselves in under 5 years.
  • EV/DACF (Debt-Adjusted-Cash-Flow) is presented as an alternative valuation metric, which is capital structure and working capital agnostic, making it a cleaner comparison to CROCI (Cash from Operations).
  • Piotroski F-Score: A rule-based quality framework used to avoid "value traps" by evaluating profitability, leverage, liquidity, and operating efficiency. Companies like ORCL, CTSH, and FLIR are highlighted as potential candidates.
  • For financials, the report focuses on companies that can earn their cost of capital when trading below or near book value, such as STI, JPM, RDN, and COF.

• Market Trends:

  • Value stocks have underperformed for eight years, with the S&P 500 Value Index declining by 20% over the last seven years and underperforming Growth by nearly 50%.
  • Value is currently the cheapest relative to other investment styles, with a P/B ratio of 15.7 (vs. 19.3 median), and P/E ratio of 15.7 (vs. 15.8 median).
  • Momentum and Strong Balance Sheets are the most expensive factors, with P/E ratios of 25.1.
  • Low Volatility is also expensive, trading at 21.7 (vs. 20.4 median).
  • Value underperforms due to weak performance, outflows from value strategies (totaling ~$50 bn), and selling pressure.
  • Value is correlated with interest rates, suggesting it may not find a bottom until the 10Y UST stabilizes.

• Market Conditions:

  • Election volatility is not priced into options, with no upward kink in the term structure.
  • UST bond duration is near an all-time high, with 20+ year bonds in private hands up 5x since 2009.
  • China M&A accounts for 28% of global M&A in 2016, up from 14% in 2015 and 4% in 2006.
  • ECM activity has been tepid, with many 2015 IPOS trading below their initial prices.
  • VC funding peaked, coinciding with a slowdown in new Unicorns.

Key Information

• GAAP vs Non-GAAP:

  • The gap between GAAP and Non-GAAP EPS is growing, with non-GAAP results being more favorable for most companies.
  • This trend is attributed to the increasing use of non-recurring items, amortization, goodwill impairments, and restructuring charges.
  • The report acknowledges that adjustments can be useful but warns of potential misinterpretation.

• Value Investing:

  • Value underperformed for eight years, with growth and momentum dominating the market.
  • Value is now the cheapest relative to other styles, indicating potential for recovery.
  • Value strategies have seen outflows, adding to selling pressure.
  • Value is correlated with interest rates, suggesting it may benefit from a rising rate environment.

• Investment Implications:

  • Investors are advised to use non-GAAP earnings with caution, as they may obscure true financial performance.
  • Value stocks may be undervalued, and valuation metrics like EV/DACF and Payback Period are suggested for better assessment.
  • Piotroski F-Score is recommended to screen for quality value stocks and avoid value traps.

Sectors and Trends

• Software and Health Care are the most prevalent sectors using non-GAAP earnings.
• Financials and REITs are more likely to use GAAP earnings.
• China's M&A activity has significantly increased, with 28% of global M&A in 2016.
• VC funding peaked, while the number of new Unicorns slowed.
• Bond liquidity has declined, while mutual fund holdings of corporate bonds have increased.

Summary Table of Key Metrics

Conclusion

The report emphasizes the importance of understanding the GAAP vs Non-GAAP earnings gap and the valuation discount on value stocks. It suggests that value investing may be a compelling strategy in the current market environment, supported by valuation metrics like EV/DACF and Payback Period, and quality screening using the Piotroski F-Score. The correlation of value with interest rates and financial conditions is also highlighted, indicating that value stocks may benefit from rising rates and improved macroeconomic conditions.