Do You Know What Your Stock Positions Really 'Delivered'?

Even with today's detailed asset allocation and performance reports, do portfolio managers really know what their common stock holdings delivered in terms of revenue, earnings, cash flow, and equity? By "delivered," I refer to the financial results attributed to the portfolio by virtue of its owning shares of common stock. The "Ownership View" digs deeper and identifies what the owner's share of the companies' results are---based on the portfolio's % of the company owned.

Here is a high-tech/internet portfolio of 10 companies with position values ranging from $5,000 - $14,000 and the related valuation ratios.

Companies (priced as of April 9, 2009 close):

Largest Holdings Company Amount % Total HPQ 14,013 14.76 ADBE 13,007 13.70 EBAY 12,001 12.64 AAPL 11,000 11.58 IBM 9,967 10.49

Smallest Holdings Company Amount % Total AMZN 5,026 5.29 GOOG 5,960 6.28 MSFT 7,003 7.37 YHOO 8,001 8.42 ADSK 8,994 9.47

And here are the P/E ratios:

Price/Earnings Ratios
Highest	Lowest
AMZN 53.43 YHOO 44.45 GOOG 27.99 ADSK 24.19 AAPL 22.19	MSFT 10.33 HPQ 10.54 EBAY 11.08 IBM 11.39 ADBE 16.23

It is difficult to intuitively know the companies' levels of attributed earnings and their respective % contributions to the portfolio, since you have to mentally analyze position weights and attributed earnings. And, it is even trickier to immediately see how those % contributions of attributed earnings levels compare with the companies' respective portfolio weights.

Here are the companies' attributed earnings levels and as % of the portfolio's total attributed earnings:

Highest Attributed Earnings
Company	Amount	% Total
EBAY	1,174.02	19.77
HPQ	1,045.45	17.61
MSFT	871.88	14.69
ADBE	616.04	10.38
IBM	526.87	8.87

Lowest Attributed Earnings
Company	Amount	% Total
AMZN	280.69	4.73
GOOG	292.82	4.93
YHOO	314.87	5.30
AAPL	317.94	5.36
ADSK	496.30	8.36

Just a few examples serve to demonstrate how portfolio weights alone---or P/E ratios alone---do not disclose which companies are delivering the highest level of attributed earnings to the portfolio:

1. EBAY has 3rd-highest weight and 3rd-lowest P/E but has the portfolio's highest level of attributed earnings.

2. AAPL has 4th-highest weight and 6th-lowest P/E but has 7th-highest attributed earnings.

3. ADBE has 2nd-highest weight and 5th-lowest P/E but has 4th-highest attributed earnings.

4. MSFT has 8th-highest weight and the portfolio's lowest P/E but has 3rd-highest attributed earnings.

This challenge of knowing the large contributors to a portfolio's attributed earnings is magnified by frequent trading and/or having a large number of holdings. In portfolios of 20-100 companies, the contribution levels become anyone's guess---without computer-based calculations.

Not only are the portfolio weights and P/E ratios hard to intuitively reconcile with attributed earnings, there are also surprises when you view the companies' attributed earnings % contributions vs. their respective portfolio weights. Here are the rankings for the portfolio's holdings:

Highest % Attributed Earnings vs. Portfolio Weighting
Company	% vs. Portfolio Weighting
MSFT	50.14
HPQ	47.21
EBAY	40.02
IBM	36.22
ADBE	-4.41

Lowest % Attributed Earnings vs. Portfolio Weighting
Company	% vs. Portfolio Weighting
AMZN	-70.96
YHOO	-65.10
GOOG	-44.57
ADSK	-35.86
AAPL	-30.08

Note how each of the top three holdings contributed over 40% more attributed earnings to the portfolio than their respective portfolio weights. Knowing the attributed levels of earnings (losses) vs. their portfolio weights serves as a valuable indicator of potential risk exposures.

OV Metrics Analytic Tool

The OV Metrics' web-based portfolio analytic tool calculates these levels of attributed earnings for up to 100 stockholdings in any one portfolio at a time. Moreover, the OV Tool also provides the same data for Revenue, Cash Flow, and Book Value. The OV Tool automatically displays and ranks these financial metrics so as to better describe the portfolio's fundamental character. You can also see a working OV Demo to get a sense how OV handles various portfolio metrics beyond the ones mentioned here.

This discussion has emphasized individual company contributions. However, the OV Tool also generates other portfolio data. For instance, the OV Tool shows that the high-tech/internet portfolio above is now valued at $94,971 with total attributed revenue of $53,051, earnings of $6,122, cash flow of $8,630, and equity of $31,741. The OV method creates the Ownership View---how the portfolio value compares to the underlying fundamental financial data. For instance, the total market value of the above portfolio is trading at 1.79x's attributed sales,15.51x's attributed earnings, 11.00x's attributed cash flow, and 2.99x's attributed common stock equity.

Recognizing that sometimes there is a need to use projected data or make adjustments to reported data, the OV Tool has edit functions to override the TTM as-reported XBRL electronic data feeds.

It is second nature to think in terms of the market value exposure of any one stock holding. However, it also helps to frame that position risk by examining the underlying attributed financial data. By combining the portfolio weights with an analysis of the attributed financial results, it tends to present a deeper view of a portfolio's composition and risk exposure.

Disclosure: I do not own any stocks mentioned in this article. I do own OV Metrics, LLC, a private company providing web-based common stock portfolio analytic tools.

References:

Website

White Paper on Use of OV Metrics

OV Demo

Comments

[winindthedust:]

So out of these stocks, which ones are you projecting as winners and losers using your analytics software? Does it work for horse races too?

Apr 14 10:05 AM

[Miles P. Je...:]

winindthedst-
In deciding whether to add A or B to a portfolio, you could quickly test and see which company improves your portfolio's average valuation ratios more. Also, you could override the historic results for A and B and see what their relative effects on the portfolio would be by using projected earnings.

You might like to check out that OV Demo. Just change some of the share positions and see if you enhance the portfolio's valuation or not.

Like horse races, there are lots of things that go into determining a stock's relative attractiveness. OV focuses on standard fundamental results---which I'd say are just one of the factors in picking a winner.

Apr 14 12:30 PM