The secondary offering priced at $160, well below the closing price of $222.13, the last price before the Q2 results and secondary announcement on July 29, 2019.

The offering was mostly pre-IPO investors and insiders selling (3,000,000 shares), along with the company selling 250,000 shares itself to fund its operations:

The secondary came just as BYND’s market capitalization surpassed that of a number of consumer staples companies in the S&P 500:

(interactive chart link)

We were curious to read the secondary offering document using redlining, to see what has changed since the IPO documents. Keep in mind that there will be changes solely due to the fact that BYND is now publicly traded, versus the pre-IPO language. We redlined the secondary S-1/A filed on July 31, 2019, against the final IPO S-1/A from April 29, 2019.

Here are our notes:

1) Stunning distribution and sales growth, along with successful partnerships and major increases in media impressions:

2) Expanding distribution in Europe and growing product lines:

3) Since the company is now publicly traded, there is a new warning around stock price volatility and potential losses:

4) Certain US states have introduced legislature regarding what products can be called “meat.” We saw this reflected in the added “state regulators” to this risk factor:

5) The rapid distribution growth noted above has resulted in some shifts in the major distribution partners:

6) There are no written contracts with the US co-manufacturers (note the EU deal mentioned above):

7) Big drop in local unemployment in the area around their Columbia, MO, facility warranted an update in this risk factor:

8) Entirely new risk factors: the growth will not last forever, and there might be serious fluctuations in the results:

9) Negative development for BYND in a lawsuit brought against them by a former co-manufacturer:

10) A relatively new development in IPO filings is the disclosure of use of Professional Employer Organizations for a number of HR/payroll tasks:

11) Surprisingly, the number of pending patent applications have dropped:

12) Added language around compliance and internal controls:

13) As we saw in the price action after the secondary offering was announced, the share price can fall. There is added language around secondary offerings’ effects:

14) Since the stock is now publicly traded, there is a whole new paragraph on the effect of research analyst coverage:

15) We can see the company balance sheet pro-forma of the offering. Note the increase in Cash and Cash equivalents, along with the increase in Additional paid-in capital:

16) New language on revenue seasonality (“summer grilling season”):

17) The IPO also lead to a simplification of the capital structure of the business (also note the Warrant crossed off in the table above):

18) The company has a small balance on its revolving line of credit:

19) New obligations: a 5-year office lease and minimum purchase commitments:

20) There is a lot of detail on Sales and Marketing activity (of course, all numbers are up: sales team, promotional events, samples, followers):

21) Notably, no changes in the serious celebrity endorser line-up:

22) New executive hire and one anticipated Board of Directors departure:

23) There is quite a bit of detail around the lock-up agreement (which was waived for this offering)

24) The underwriters have the standard “greenshoe” option to sell additional shares: 

Get in touch with Sentieo to try your own redlining!

The post What We Learned From Redlining Beyond Meat’s (Nasdaq: BYND) Secondary Offering Documents appeared first on Sentieo.

Pinterest is a visual discovery and bookmarking tool. It has created a niche on its own: we see it alongside Twitter, Instagram, Snapchat and LinkedIn, in terms of having created a unique product with social aspects.

Pinterest allows users to collect and save images within categorized boards, similar to the way that Slack discussions are organized into topic-specific channels. (We reviewed the Slack IPO filing here).

Pinterest is considered “social” because it allows users to follow people or specific boards based on their interests, and this aspirational “pinning” is fun, easy, and sometimes addictive.

Pinterest is a unique advertising business: not only is there high intent (i.e. collecting ideas for a bathroom remodel), but its various ad types (i.e. carousel, ecommerce) are covertly placed within the rest of the pinned images. In addition to Pinterest’s ads being hard to avoid, the ads are routinely pinned by users, thus increasing their reach. (We haven’t found many other platforms where this occurs).

Pinterest is also expanding its ecommerce capabilities, including the discovery of products from photos taken by users.

In our view, Pinterest is a unique property in the early stages of monetization (esp. international), similar to where Facebook was after its IPO in 2012. Unlike Facebook, however, there are really no questions around the monetization potential. (Mobile was a big question for Facebook). We are very optimistic on Pinterest in the long term, in contrast to the large unknowns around AVs, as we discussed in our Uber and Lyft AV review).

Product Overview

Below is what the Pinterest homepage for the desktop application looks like for one of our team members. The content suggested for browsing is tailored to several existing boards. Also note the carousel ads from blue chip advertisers (Home Depot and Walmart).

Opening up a board (called Art Deco in this case), reveals the saved pins and invites the user to explore more content of the same kind algorithmically. Users can also search textually. We can also see that this board has 13 followers who will see any new content as it’s added.

Clicking on “More Ideas,” we see an invite to shop, follow similar boards, and an ad that we can pin to save in our board or click to visit.

Scrolling down, we see two more unobtrusive but highly relevant ads, fitting not just the theme but also the color scheme of the suggestions and the board.

Financial Review

After this brief product and navigation overview, let’s look at Pinterest’s post-IPO 424 (full document) and their Q1 results (10-Q here).

Pinterest IPOed about a month ago in April at $19 per share, then went up to $34 before easing into the mid-$20s after the Q1 results. (Interactive chart)

Notes from our read-through of Pinterest’s Form 424 filing:

Pinterest’s own business description is centered around inspiration and discovery.

Pinterest’s value proposition to advertisers in clear: 250 million MAUs and 80% of US moms.

Further, Pinterest hits consumers at different stages in the shopping journey:

Pinterest is naturally a high-intent environment that is a secular ad dollar share-taker:

The growth vectors that Pinterest is listing include:

• on the consumer side, more shoppable products (similar to the recent Instagram ecommerce integrations)
• more verticals (men can be pinners, too!)
• more localized content
• more commercial content to be “discovered”

On the advertiser side, the growth will come from better relevance, more ad products, and more native and third-party tools.

As we mentioned in our introduction, these are all currently existing monetization paths. Pinterest, in our view, has a very low technological risk.

Pinterest’s Risk Factors include a lot of the “usual” factors that we see in tech IPOs. We have highlighted the major ones, in our opinion:

Pinterest needs the network effects of people contributing and sharing content on the platform, it depends on search engine traffic, and there might be competition.

Further down in the document, we see examples of the dependence on search:

We also see the competition around visual and ecommerce:

In our view, external competition is really the main risk factor: Pinterest has the network effects and the visual search leadership, and digital advertising in its many forms was, is and will be a share-gainer regardless of the economic cycle.

We can see Facebook’s Instagram launching a competitor, similar to what happened with Stories and Snapchat. We do not see this succeeding easily. Pinterest is centered around topics (the way Slack channels or Twitter lists are), unlike the personality-driven Instagram product.

There is a bad precedent though: Snapchat was hit by Instagram’s launch of Stories: the company had to include this in its pre-IPO filing (below), and we saw its DAU growth dampen quickly, and flatline afterwards.  

Snapchat’s DAUs have been at 0% growth in the last two quarters, and is actually declining in North America and Europe.

And Snapchat’s stock never really recovered: it is down by about two-thirds from the post-IPO high and its NTM EV/Sales multiple (left axis) has compressed from over 26x to under 9x. (Interactive chart)

Back to Pinterest: the financials look great.

We see exactly what growth investors want to see: increasing revenues (2.5x over two years) AND narrowing losses (GAAP loss reduced by 2/3rds over the same period).

Pinterest’s operating metrics are also going in the right direction: we can see that US growth has naturally flatlined at around 82 million (this is already very well-penetrated), but international is 2x larger already, and growing very well.

Unlike the user metrics, revenue metrics are very heavily skewed to the US: this is where the largest opportunity lies with Pinterest. There is practically zero international revenue, and dominant US platforms have demonstrated, time and again, that international user monetization is very doable.

The picture is really stunning at the ARPU level: the US monetized at $1.59 to $3.16 per quarter in 2018, while international users monetized at $0.05 to $0.09 per quarter. International monetization is lower in Pinterest’s comps like Facebook and Twitter as well, but it is not non-existent like we see below.

Perhaps you saw the seasonal spikes in the charts above for US users: Pinterest’s quarterly metrics reveal that the company was actually profitable, on a GAAP basis no less, in both Q4 2017 and Q4 2018. This confirmed our initial feeling that Pinterest is very close to profitability.

Pinterest is led by its founder, and its management team has prior experience around “Big Tech.” The founder and several employees came from Google, Square, HP, and Microsoft. This is the type of professional background that we like to see.

The Board consists of venture capitalists, predictably, as well as people with online media backgrounds.

The governance is similar to that of other tech IPOs (ie. dual class shares). The pre-IPO shareholder composition is also typical of recent high-profile tech IPOs: founders, management and VCs.

Like we noted in our Slack post, companies are waiting for longer before IPOing: this results in multiple rounds of private financing (here up to Series H).  

Since Pinterest reported results recently, we also took a look at their Q1.

First, we saw that everything is going according to plan: more international markets are being monetized, and more features are being added to gain share with ad clients.

The financials also looked great: 54% revenue growth and 22% MAU growth, driven by 29% international MAU growth. MAU growth has been fairly steady in the last 4 quarters: 25%. 23%, 23%, 22%.

ARPU is also growing rapidly, both domestically and internationally:

Losses also improved as a percent of revenue:

However, the stock dropped as media reports indicated that the guidance for 2019 was light (along with the usual “how can they bomb their first quarter?”):

We are much more optimistic on the business in the intermediate and longer-term.

This slide below caught our eye in the earnings release deck. On a running four-quarter basis, Pinterest is monetizing in the low $3’s globally, and literally in the pennies for the international segment.

This really reminded us of another great advertising business that you might have head of: Facebook. In this 2012 deck, we can see that pre-IPO, in 2010, Facebook had similar US monetization numbers.

Facebook is now running US monetization at 10x — roughly the ARPUs from back then.

We see something similar with Twitter, but in 2016 (around the same number of MAUs- though this is not a great metric for Twitter and the company recently switched to mDAU, monetizable DAU). US ARPUs are also similar to what Pinterest is running now. Twitter’s US ARPU is now 3-4x these 2016 amounts.

We can see Pinterest monetizing at levels above Twitter — due to the high level of intent — and lower than Facebook, as Facebook has two large monetizable properties.

We can see that Pinterest is currently trading at around 15x EV/Sales on an NTM basis:

Facebook also spent a lot of time trading in the low teens on a EV/Sales basis:

What is different here is that, unlike Facebook’s “early years,” we know for a fact that mobile is monetizable, and we know that video is monetizable, so the business risks are much lower. It really is heavily about the management team executing and following the path that has already been established by others in the space.

We see a similar picture when we combine EV/NTM Sales for LinkedIn, Facebook, Twitter, Snapchat and Pinterest on the same scale: high multiples are not unusual in the early years. (Interactive chart link)

This is even more clear when we align the origins (trading start) for the EV/Sales chart above. (Interactive chart link)

Completely speculatively, we can see Facebook acquiring Pinterest: we have no special knowledge and we would guess that Facebook must have looked at doing this prior to the IPO.

But we know that Facebook is a very smart acquiror (Whatsapp and Instagram being Hall of Fame acquisitions), so it is entirely possible that Facebook (or Amazon) will step in if Pinterest starts gaining more traction. This is a similar situation to LinkedIn: it became the de-facto depository for global, white collar professional information, and it was acquired by Microsoft after a short stint as a public company. We also think that Twitter will be an acquisition target if the business continues its “Disney-fication”, a process we discussed when we listed it as one of our top 11 long ideas in January 2019.

To summarize our view, we see Pinterest as a unique advertising and potentially ecommerce property that has established a very attractive vertical, and is only now turning on the monetization “machine.” Valuation is not dissimilar to what we saw in early Facebook, but with substantially lower business risks: we know what works.

The post Is buying Pinterest in 2019 like buying Facebook in 2012? appeared first on Sentieo.

How It Works

We used Sentieo’s natural language processing technology to scrape all the earnings transcripts published in the last year. We then processed and cleaned the data to distinguish the keywords in the text. We highlighted the words in each transcript that occurred on the greatest weighted average basis. We also eliminated filler words (like “or”, “and”, etc.) and conducted analytics on the cleaned data, like part-of-speech tagging (picking out nouns and verbs for semantic analysis) and sentiment analysis (quantifying the tone of the text).

Natural language processing powers the Sentieo platform’s document search and transcript sentiment functionality, putting its users at the forefront of financial research technology.

The Most Popular Transcript Keywords Of 2018, By Sector

Our 2018 report spans all sectors – from consumer discretionary to utilities. Here’s a sample page of our report on the Consumer Staples sector. For the full, free report, please download it here.

We want to hear your thoughts on this report, or any of our other whitepapers! Your feedback is welcome at hello@sentieo.com. For a free trial of Sentieo or to learn more, get in touch here.

The post Word On The Street: The Most Popular Transcript Keywords Of 2018, By Sector (An Annual Report By Sentieo) appeared first on Sentieo.

Our third article on the Fed leverages third-party political trend data as well as powerful Sentieo opinion mining to break down past speeches from top contenders for the Fed Chair. We discuss possible 2018 scenarios and delve deeper into the surprising results we come across. Brush up on the previous articles and see what’s coming up next in our series using the FedSpeak lexicon here:

Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed
Why Is The Fed Still Raising Rates? The Yellen Effect
Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches
Predicting The FOMC Statement With Beige Book Sentiment Data

We set out to analyze the historical speeches of the top Fed candidates with Sentieo’s natural language processing capabilities and in the process, we learned something interesting. It doesn’t matter.

The Federal Reserve is not a one-woman organization and while the chair tends to drive policy, the minutes reveal that the entire committee weighs in on decisions. Some subtle changes over the course of this year have changed the makeup of the FOMC into a more hawkish committee. Furthermore, the composition of the FOMC will change when four of the regional bank presidents and voting members rotate out for their peers.

Earlier this year, Daniel Tarullo resigned. And just a little over a month ago, Stanley Fischer, a longtime central banker, resigned from Fed Board of Governors. In their place, Donald Trump has nominated Randal Quarles, a monetary hawk who favors a rule-based approach to monetary policy, as vice chair for bank supervision. Unfortunately, transcripts of Mr. Quarles views on monetary policy are not readily available, so he is not included in the quantitative analysis.

Who will get the nod?

Rather than analyze every proposed Fed chair that has been mentioned in the news, we used the wisdom of crowds to narrow down the analysis.

Political prediction market PredictIt shows that current governor Jerome Powell is the frontrunner by a wide margin, followed by Stanford professor with famously controversial views on monetary policy John Taylor and current chair Janet Yellen. Probabilities of nomination for Gary Cohn and Kevin Warsh have decreased dramatically and Neel Kashkari has never really been a serious contender. These predictions may change in real-time and are based on those at time of publication.

PredictIt political prediction market end of day prices for contracts on who will be named the next Fed Chair

Where do the contenders stand?

We analyzed the top four contenders using a corpus of their past speeches and written work on monetary policy and the Sentieo FedSpeak lexicon, looking for the way they mentioned inflation and unemployment. Each mention is scored as either hawkish or dovish, and the total score is equal to (hawkish mentions – dovish mentions) / total words.

Powell is clearly less hawkish than either Yellen or Taylor. On a standalone basis, it would appear that this choice should matter.

However, the overwhelmingly hawkish change between the 2017 Fed and the 2018 Fed renders the Chair decision almost meaningless.

2017 Fed Average Hawkishness for each FOMC member

The early 2017 Fed (before the resignation of Tarullo and Fischer) had a mean hawkishness of 0.24%.

Average hawkishness of members of a potential 2018 FOMC committee under Chairman Powell

But the loss of Fischer and Tarullo in 2017 meaningfully shifts the balance for 2018. The new 2018 FOMC under any of the top four frontrunners will be more hawkish.

Comparison of the Fed average hawkishness under each potential chair and the 2017 committee

It is important to note that there are still three open positions on the Federal Reserve Board of Governors and President Trump has the power to fill all of those positions. If Powell is nominated as chair he will leave four open seats that can dramatically alter the makeup of the committee. Monetary policy positions do not necessarily align with politics so it not a sure thing that he will nominate a hawk. If President Trump were rational, we would expect him to nominate doves who will keep interest rates low and avoid dulling the stimulus effect of his tax plan on the economy.

What will happen to rates?

CME Fed Funds rate futures markets are in consensus about a rate hike in December of this year. However, after that, the markets are more divided. In March of 2018, there is a 57% probability the target rate will be at 125-150 bps and 40% probability at 150-175. In June, there is a 35% probability the target rate will be at 125-150 bps, 45% probability at 150-175, and a 17% probability at 175-200. A decade of loose monetary policy may be coming to an end with a more hawkish panel of decision-makers, still dependent on three very important and undecided factors of course.

The post Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches appeared first on Sentieo.

Our second investigation of the Fed’s sentiment discusses the impact Chairwoman Yellen has had on the Federal Reserve since her rise to the Chair in 2014. We created and utilized our ‘FedSpeak’ lexicon to delve into the correlation between the Fed’s intentions and Yellen’s speeches before colleagues, Congress, and the press. Read the previous article and see what’s coming up next in our series here:

Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed
Why Is The Fed Still Raising Rates? The Yellen Effect
Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches
Predicting The FOMC Statement With Beige Book Sentiment Data

The Federal Reserve conducts the nation’s monetary policy under a mandate from Congress to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.

The Fed began its current round of rate hikes in 2015, and the Fed Funds target rate now stands at 1.25%, up from 0% two years ago.

The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate.

Inflation (PCE), Unemployment, and the Fed Funds rate

Since the Fed began the most recent rate tightening cycle, the PCE has fallen from just under 2% to 1.3%. If we consider a policy lag of 6 to 9 months for Fed hikes to feed their way into the broader economy, it would appear that the early hikes in 2016 have had their desired impact on inflation, and with the most recent tick up in the unemployment rate, one would think the Fed would stop hiking now.

And yet the CME’s Fed Funds futures market is pricing in a greater than 70% chance of another hike in 2017, with two more hikes to follow in 2018.

We used Sentieo and natural language processing of public Federal Reserve documents to figure out why.

If actual inflation is falling, perhaps the Fed is worried about inflation expectations. However, Google searches for “inflation” have remained relatively stable over the past 10 years within a normal seasonal band. By contrast,  “unemployment” searches look to be bottoming out of a long downtrend.

At the corporate level, using the Sentieo Document Search and Plotter functions, we can see that conference call transcript mentions of words relating to “pricing power” and “price increases” remain at a fairly stable level, if perhaps a modest uptrend, but still without any prominent increase in the expectation of pricing power or inflation.

Business TV news analysis shows only a modest increase in stories about inflation since 2016.

Mentions of inflation across major cable business news networks has not risen over the past year and a half

And NY Times business articles also show only a slight decrease in mentions of inflation.

NY Times Business news articles mentioning inflation

So why is the Fed still expected to hike rates?

The simple reason, we discovered, is that Fed Chair Janet Yellen is hawkish by nature.

We developed our own lexicon, the Sentieo “FedSpeak” lexicon, and analysed seven years’ of Fed Chair speeches to Congress from 2010 to the present day with a text mining algorithm. We specifically focused on the adjectives used around the word “inflation.”  

Janet Yellen took the helm of the Fed on February 1st, 2014, and gave her first testimony to Congress later that month. Looking at the average sentiment of her speeches versus those of her predecessor Ben Bernanke, there’s a clear break in tone upon her arrival as Fed Chair.

Yellen is definitively more hawkish when compared with Bernanke in her own speeches, but the minutes mute that impact with the other FOMC members

By contrast, there was much less of a noticeable change in tone of the FOMC meeting minutes, which includes discussions by all members of the FOMC, not just the Chair.

The Chair exercises the final authority over what the Fed ultimately does as laid out in the FOMC Statement published immediately upon conclusion of the meeting.  These statements, too, showed a significant “Yellen Effect.”

And, starting in 2011, the Fed Chair began sitting for press conferences following FOMC meetings.  Here, too, there’s a clear change in tone between the two Fed Chairs.

And yet the Fed hasn’t changed its hawkish tone, as we showed in our previous article on the Fed.

The Fed probably would have already halted its tightening cycle, given the increased negative sentiment of its communications, the recent drop in PCE, and a modest reversal in unemployment trends of late. But the “Yellen Effect” is keeping the hikes on. In our next article, we’ll analyze past speeches given by frontrunners in the race to replace Janet Yellen at the helm of the Fed when her term expires in February 2018 to see if we’ll get a hawk or a dove next.

The post Why Is The Fed Still Raising Rates? The Yellen Effect appeared first on Sentieo.

This piece kicks off our new series on the analysis of the Federal Reserve using Sentieo’s natural language processing power and flexible Doc Search technology. We will focus on bringing interesting ideas and surprising revelations derived from thousands of public federal reserve documents. Join us as we scrutinize meetings, congressional testimonies, and press conferences with some truly impressive technology; and see what’s coming up next in our series:

Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed
Why Is The Fed Still Raising Rates? The Yellen Effect
Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches
Predicting The FOMC Statement With Beige Book Sentiment Data

The Federal Reserve System’s Federal Open Market Committee (FOMC) meets eight times a year, at 2 p.m. Eastern Time in the basement of a nondescript, Washington, D.C. office building. The terse statements released after those meetings drive the direction of global financial markets and the meeting minutes are carefully scrutinized carefully by the media.

We parsed recent statements and minutes since 2012 using Sentieo’s natural language processing and sentiment analysis and found some interesting trends.

For the most recent statement 9/20, the strongest topic continued to be inflation, as highlighted in the unfiltered word cloud shown here.

The intensity was roughly equivalent to the prior statement, as the Fed continues to be vexed by an inflation shortfall versus expectations. Based on the statements alone, this analysis would suggest that Fed intentions have barely changed.  However, when we apply sentiment analysis to the words in the documents using the Loughran-McDonald context-specific lexicon, which assigns a simple positive or negative value to words based on the financial services industry context, the 9/20 statement occurs as much more hawkish.

The statement highlights the impact of Hurricanes Harvey and Irma, showing a much stronger negative tone versus the 7/26 statement with these topics.  However, a reading of the statement itself shows these effects were noted as being short-term and unlikely to alter the medium-term economic outlook.  More striking, however, was the stronger array of positive words which made the 9/20 statement look more hawkish than the 7/26.  Markets were surprised by this, and the probability of additional hikes this year went from 50% to 69% after the statement came out.

We used Sentieo’s redlining capability to compare the two documents to each other and found the biggest difference to be the comments on the hurricanes:

We next looked at FOMC meeting minutes (which will not be released until next month for yesterday’s meeting) since 2012, looking for trends.

First of all, we looked at the most commonly used words and found inflation is at number 1, good news for a central bank that doesn’t have an inflation target mandate (if you’re a monetary hawk).

Most commonly used words in Fed meeting minutes since 2012

Next, we looked at sentiment over time for the minutes.

Fed meeting minutes sentiment over time since 2012

A localized regression (LOESS) line shows relatively flat sentiment overall but a slight uptick in the past year. More interestingly the first fed meeting of each year has sharply higher sentiment (much more positive tone). We also looked at sentiment scored for ‘uncertainty’, rather than just positive or negative:

Fed meeting minutes uncertainty over time since 2012

This seems to indicate that the Fed has become slightly more uncertain. To provide more transparency into the lexicon driving these outcomes, we looked at the frequency for each sentiment category, including a fourth, ‘litigious’.

Frequency Chart of top words in Fed minutes for each category of Loughran-McDonald lexicon

In the next article, we’ll look into the FOMC meeting minutes and the unclear reasoning behind the continued rate hikes.

The post Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed appeared first on Sentieo.

No other company has done a better job of attracting constant media attention than Amazon ($AMZN). With shares hovering around $1,000 per share, the retail-tech giant now stands as one of the four largest companies in the S&P 500 with a nearly $500 billion market cap. That represents a more than 50,000% return from the $1.73 IPO price two decades earlier. Investors fortunate enough to snatch up shares when it first hit the public market can comfortably call themselves millionaires.

While shares no longer look cheap by any traditional metric, money managers believe ongoing investments will result in even greater future returns. This is because Amazon has shown a remarkable ability to succeed in new spaces that it expands into. This is in many ways, the opposite of conventional wisdom. Large corporations often struggle when they stray outside of their core competencies. Amazon has been able to flip this script.

Amazon’s ability to accomplish this comes in large part from the leadership of its CEO, Jeff Bezos, who has consistently pushed the philosophy of, “Day One.” This excerpt from Amazon’s last letter to shareholders illustrates his commitment:

“Jeff, what does Day 2 look like?”That’s a question I just got at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic.

Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization?

Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.”

Of course, the true measure of success for any public company and its philosophy is how its share price performs. As Amazon’s reach has broadened into new industries, the number of companies who need to mention Amazon as a competitor has broadened as well.

We used Sentieo’s advanced document search to construct a query that uncovers every mention of Amazon as a competitor in public company filings (10Ks, 10Qs, 8Ks, earnings calls, investor presentations, etc.) in the last 10 years. In the chart below, you can see that mentions of Amazon have grown considerably over the past 10 years while the stock price has also grown in lockstep.  

Mentions of “amazon competitors” in public filings and AMZN stock price (Source: Sentieo Document Search)

Drilling down into specific sectors, the same pattern shows itself. Take Air Freight and Logistics, a nascent segment of Amazon’s business, for example. It was only in 2016 that Amazon first made an announcement to lease 20-40 Boeing jets to augment their distribution capabilities. If we look at the mentions of Amazon in only Air Freight and Logistics company filings, we again see the number of mentions skyrocket.

Mentions of “amazon competitor” in Logistics company filings

Making matters even worse for potential competitors, technological advancements in automation and robotics promise to reshape many consumer facing sectors. Amazon recently unveiled a cashier-free store, powered by computer sensors and machine learning, aimed at upending conventional grocery stores. Outside of a gentle attempt at fresh food delivery, supermarkets were previously an untouched market of the retail giant due to the logistical nightmare they create for distribution networks.

This makes Amazon’s recent acquisition of Whole Foods ($WFM) even scarier for players in the American grocery market. With the synergies provided through the Whole Foods acquisition, look for Amazon to continue this trend in the grocery industry. Competitors are already scared. Mentions of Amazon among grocers have again begun to climb immediately following the merger announcement.

Mentions of “amazon competitor” in Grocery company filings

E-commerce awareness has been on the rise in the grocery and food retail industry for a while now as well. Below is a chart showing all mentions of e-commerce in that sector since 2011. As Amazon has slowly driven into the market with efforts like Amazon Fresh, mentions have risen. Private companies like Instacart have had an effect here as well. Since the Whole Foods merger, mentions have shot up exponentially higher.

Mentions of “e-commerce” in Grocery/Retail company filings

Amazon’s penchant for disruption above generating a profit makes it difficult to create an accurate picture of the future. This also dampens the long-term outlook of Amazon’s victims, who span a growing set of sectors. While Amazon’s stranglehold on retail and technology doesn’t appear to be loosening, it’s only a matter of time before the online giant overturns another unsuspecting industry. Based on the influx of corporate filings mentioning Amazon, watch for a diverse group of companies to embrace technological change, or perish in Amazon’s wake.

The post Amazon Competes With Everyone — And Wins appeared first on Sentieo.

The last three years have been dismal for fundamental long/short managers, and stock picking at large. However, at Sentieo, our analysis shows that we are currently in the best environment since before the 2008 crash for picking stocks. Now, that isn’t to say that this is the best time to buy stocks, nor is it a prediction of fund performance. But, according to an analysis of one metric, cross-correlation, the current market should provide an unusually ripe environment for stock picking.

First, a bit about what we mean by cross-correlation: The pairwise correlation between two stocks is a value between -1 and 1, that indicates how likely the two securities are to move in the same direction. Over a given time period, two stocks that perform identically will have a value of 1, two stocks have no correlation at all will have a value of 0, and two stocks that are perfectly inversely related will have a value of -1.

We ran the pairwise correlations between every stock in the S&P 500 and every other stock in the index (249,500 computations!) from the 2007-8 financial crisis until now. Averaging all of the correlations provides an indicator of how much stocks move in tandem with each other. If the cross-correlation is 1, there would be no opportunities for stock picking since all stocks would move in tandem with each other. The higher the value of the index, the more difficult it is to make money by selecting individual securities at that point in time.

The graph below shows the cross-correlation for the entire S&P 500 over the past decade. There are a few important takeaways from this chart. First, it is clear that the cross correlations of the S&P 500 are at decade lows. Second, we see a preponderance of large spikes in the data.

S&P 500 Cross-Correlation

As you can see, the spikes correspond with market shocks, the major macro events of the last decade. The jump in cross-correlation following a market shock is to be expected. When this sort of event happens, the entire market tends to turn in one direction as it collectively decides to buy or sell. The most recent inflection point, however, the 2016 election of Donald Trump in the United States, behaves differently.

The 2016 US Presidential election has driven correlations to new lows. Furthermore, correlations in the market actually began dropping prior to the November 8th election day, around the time when then-FBI Director James Comey sent a letter to Congress on October 28th. As opposed to the market shocks where the market all reacts in the same direction, it seems the collective market doesn’t know how to react to Donald Trump with any certainty. In other words, as of today, Donald Trump is an inherently uncertain entity that is creating opportunities for security selection.

Impact on Hedge-Fund Returns
As shown in the chart below, hedge fund monthly returns for long/short equity managers tend to react inversely to cross-correlation, as we would expect. This provides further validation to the idea that cross-correlation is a solid predictor of the overall environment for stock picking.

Monthly Returns of Long/Short Equity Funds

We can further apply cross-correlation to show the volatility of selected sub-sectors of the S&P 500. Doing so, we can demonstrate which specific sectors may have benefitted the most from the US election, again, purely from a stock-picking perspective.

The Financial Sector

The financial sector, understandably, showed the largest drop in correlation after the Comey letter. (In the graph below, the letter’s release corresponds directly with the drop preceding the 2016 election). The sector overall, however, remains relatively highly correlated. This is to be expected from a heavily regulated industry, with regulation having a dampening effect on volatility. The five largest stocks in this sector are the following; JPM, WFC, BAC, HSBC and C.

S&P 500 Financial Sector Cross-Correlation

The Technology Sector

Technology looks fairly similar to financials in that we see a precipitous drop following the Comey letter, with a small bounce back in recent months. The group, however, runs at a lower average correlation in general than does the Financial sector. Tech correlations have crept up recently because some investors and brokerage houses have begun voicing concerns about valuations in the past few weeks. The five largest stocks in this sector are; AAPL, GOOGL, GOOG, MSFT and FB.

S&P 500 Technology Sector Cross-Correlation

The Consumer Services Sector

The Consumer Services sector has shown a modest decline in correlation since the election, but with no bounce back in recent months. Furthermore, it has the lowest cross correlation among all the sectors listed, at less than 0.2. The largest five components of this sector are AMZN, WMT, HD, CMCSA and DIS.

S&P 500 Consumer Services Sector Cross-Correlation

The Energy Sector

The Energy sector has not seen the same large drop in correlation resulting from the election. It has shown some mixed results of late, perhaps in part due to the recent selloff in oil prices. The five largest stocks in this sector are; XOM, GE, CVX, TOT and PTR.

S&P 500 Energy Sector Cross-Correlation

The Capital Goods Sector

The Capital Goods sector has dropped to its lowest point in the decade by far; a more drastic reaction than all of the previous sectors discussed. This is perhaps due to the prospect of increased infrastructure spend which has been proposed not only by the White House, but also by members of the Democratic party. The five largest stocks in this sector include; TM, BA, HON, UTX and LMT.

S&P 500 Capital Goods Sector Cross-Correlation

While not making a call on the direction of stock prices, we have found that the current environment is the best for stock picking in a decade and that this is, in some capacity, due to the uncertainty emanating from the Trump Administration. We have found this effect to be particularly pronounced in the Capital Goods and Consumer Services sectors.

Therefore, active long/short fundamental equity managers should be looking for stock picking and pair-trading opportunities right now.

The post According To One Metric, This Could Be The Best Time For Stock-Picking In A Decade appeared first on Sentieo.

It’s an old Wall Street adage, and the data appear to bear it out.  Since 1950, the S&P has returned 3.4% on average for the year up to April, while returns from June to October have averaged only 0.9% over that time.

However, over the last five years, the dynamics of the monthly seasonal trade have not only changed but have become even more pronounced.

Summertime Has Been Producing Good Returns:

Beginning in 2012, January to April returns have averaged 4.9%, similar to the full series from 1950, but June to October returns have also averaged a healthy 3.95%.

Most notably, July has emerged as a very strong month, and June has turned from negative to positive.  Also of note, the seasonal weakness in September has pulled forward into August.

This analysis suggests that August, not May, is the real bogeyman for investors.

Volatility Has Been Spiking In August:

Another way to come to the same conclusion is to look at the average returns of the CBOE VIX index shown below.

The VIX index is a measure of stock market volatility, and rapid changes in market volatility are highly correlated with negative stock returns.  Over the past five years, August has been a very volatile month.  By contrast, July has lower average volatility, much like February, March, and November.

The conclusion – Sell in May has (recently) gone away.

Which then leads us to ask: How to monetize this idea?

Sectors Which Do Well In the Summer:

First, we looked at sectors which have, since 2012, typically done well over the June-July time frame ahead of August’s turmoil.

Energy, Basic Industries, and Transportation have tended to under perform.  Health Care, Utilities and Consumer stocks have tended to do well and that’s where we should look for buys.

Seasonal Buy Rank Table:

Taking this analysis one step further, we can rank stocks which are not up a lot year to date and yet which usually do well in the summer months before August.

Target (TGT) screens well.  Relative to the S&P 500 it is only in the 3^rd percentile for year to date returns, yet it is in the 81% percentile for June-July going back to 2012.  It’s also a consumer stock, which is a good summertime sector as we have shown above.

Further proof of the historical returns for June and July for this stock can best be seen by using the Returns menu in Sentieo, shown below.

TGT is a solid green in the month of July going back to 2009.

Where might monthly seasonality come from?

Historically the stock market was much more driven by seasonal cycles in manufacturing and crop harvesting.  In the modern era, it may be the case that investors’ expectations are more and more the source of returns.

Again using the Sentieo platform, we can see internet searches for the word “Earnings” and use that as a proxy for which months we are likely to see the most earnings reports.

As shown below, the big search months appear to be January-February, April, July, and October.  So one theory explaining the shift in the dynamics of monthly seasonality the past five years versus a look back to 1950 might be that modern managements are far more savvy about setting lower expectations earlier in the year (hence weak January results) and are able to “jump over” the low bar later in the year – thereby driving the now-more-positive returns in July and October relative to history.

Conclusion:

Sell in May?  No way!

Summing it all up, before you follow a well-worn adage, take a minute and check against the monthly returns map in the Returns menu on the Sentieo platform.  You may capture returns others don’t.

And don’t forget: this year, it may pay to wait to sell until July!

The post Sell In May Has Gone Away? appeared first on Sentieo.

We’ve compiled a cheat sheet of Canadian stocks that are in the process of buying back a substantial portion of their float. We looked at the past 3 months of filings to find stocks that are:

• In the process of a SIB
• Have completed a SIB and continue to repurchase shares

The market capitalizations of the 5 stocks we’ve found range from C$133M to C$3,186M, so there should be a reasonable amount of liquidity for the largest stocks in this group. Without further ado, here’s our cheat sheet…

Callidus Capital Corporation (CBL:CN)

• Mkt cap: C$1,010M
• Book value of C$501M as of the latest quarter (Q3 2016).  Price-to-book is roughly 2X.
• Callidus recently finished its substantial issuer bid, buying back 2,849,604 shares at $16.50 per share.
• Jan 16 share price: $20.61
• Callidus’ Dec. 29 press release (link to Sentieo doc/original press release) announced a buyback program (for 5% of shares outstanding) as well as the formation of a special committee for potentially taking the company private.
• Catalyst Capital Group, the major insider (67% of outstanding), does not intend on selling into the NCIB buyback program.

Interestingly enough, Callidus’ shares have continued to appreciate despite some of the issues it is currently embroiled in.

1. Callidus and The Catalyst Capital Group has commenced litigation against its naysayers: West Face Capital (an asset manager) and Veritas Investment Research (an independent research firm). West Face has made the court documents easily accessible via CatalystLitigation.com. The first two pages of West Face’s statement of defence briefly summarize their reasons for betting against shares of Callidus.
2. Arc Productions, the animation production company mentioned in Callidus’ 2015 annual report, entered bankruptcy in 2016. Callidus is listed as a secured creditor. Sentieo’s Financial Document Search feature could not find any SEDAR filings that mention “Arc Productions” other than the 2015 annual report. This process can be repeated for any other Callidus borrowers that may be in financial distress.

Certainly, this is not your everyday tender offer. There have been two very different narratives: a financial innovator buying back its shares… or a subprime lender that has hit a few bumps in the road. Investor sentiment has moved between the extremes, sending the stock from C$7 in Dec 2015 to its current price of $20.61. Unraveling this unusual situation may pay dividends.

Northern Blizzard Resources (NBZ:CN)

• Mkt cap: C$464M
• On Dec. 12, 2016 the company announced a substantial issuer bid (snt.io/1V2Kas57B, press release) for up to C$75.0M at a price of $4.00/share. The Offer will remain open until 5:00 p.m. (Toronto time) on January 20, 2017.
• Jan 16 share price: $3.79, a 5.25% discount to the purchase price.
• Northern Blizzard’s directors and officers do not intend to tender their Shares.
• R/C Canada Coöperatief U.A., which owns 28.9% of Northern Blizzard’s Shares, does not intend to tender any Shares pursuant to the Offer. NGP IX Northern Blizzard S.à.r.l., which owns 42.4% of Northern Blizzard’s Shares, has entered into a lock-up agreement to tender all of its Shares pursuant to the Offer.
• Trades at 0.6X book value.

Northern Blizzard is one of the unfortunate victims of oil falling to $50. But with oil prices slowly creeping upwards, there may be light at the end of the tunnel for this heavy oil company.

Trez Capital Mortgage Investment Corporation (TZZ:CN)

• Mkt cap: C$133M
• Repurchasing $35M in shares.
• Dutch tender offer: C$8.00 to $8.30 (in increments of 5 cents)
• Jan 16 share price: $7.98, a 0.25% discount to the lowest end of the tender offer.
• Insiders intend to tender (snt.io/jD2KaJkU4, press release): “The directors and management of the Company have advised that they, or entities related to them, intend to tender an aggregate of 623,628 Shares pursuant to the Offer”

Home Capital Group (HCG:CN)

• Mkt cap: C$1,967M
• Completed a substantial issuer bid in 2016, repurchasing C$150M in common shares.
• Repurchased $33.695M shares in the latest Q3 2016 quarter.

Home Capital is somewhat of a battleground stock (at least on finance Twitter), with the bears arguing that the Canadian housing market is overheated and bound for an ugly collapse. If a housing collapse does indeed occur, the companies that lend to riskier segments of the market could be hurt harder.

The stock currently trades at only a minor premium to book value (1.1X). Analysts are projecting a return on equity of 15.5% for 2017 and 14.9% for 2018.

TransForce Inc (TFII:CN formerly TFI:CN)

• Mkt cap: C$3,186M
• Announced a modified Dutch Auction, which concluded on March 28, 2016. The company repurchased 2.7M shares at a price of $22.00, for a total of $59.4M.
• Directors and officers of the company did not tender shares into the SIB.
• Since then, the company has continued to repurchase shares. In the latest Q3 2016 quarter, the company spent $41.8M buying back shares.
• The company trades at 13.6X estimated 2017 earnings.
• The company is not cheap on an asset basis, trading at a price-to-book ratio of 2.0X.

A word of caution

While investors often cheer buybacks, we note that buybacks tend to be common when share prices are high and uncommon when share prices are low. When putting together our July 2016 post “A list of potentially cheap stocks buying back their shares“, we noticed that very few companies actually bought back shares when the markets bottomed in 2009. Many serial repurchasers changed their tune in 2009, choosing instead  to accumulate cash. Few were greedy when others were fearful.

So, please do your own valuation work and analysis on a stock. Simply looking at management’s conviction in buying back shares is no substitute for valuation work.

We also hope that we’ve inspired you to think about other unusual situations that are worth looking into. Searching through regulatory filings like SEDAR and EDGAR is a quick way to find unusual and obscure situations in the stock market. There are many pockets of the stock market that receive relatively less attention, sometimes leading to undervaluation that prompts management to try to buy back an unusually large portion of a company’s float. To write this article, we simply searched for the phrase “substantial issuer bid” in documents filed in the past 3 months. This allowed us to quickly pinpoint stocks with unusual buyback activity. We encourage you to use your own imagination to think up of other ways of finding interesting situations in the markets. With thousands of stocks out there, many of them are just waiting to be discovered.

The post 5 Canadian Companies With Unusually Large Buybacks appeared first on Sentieo.

Investment analysts, by and large, are a pretty smart group. If they can find a better way to do their job, they will. So it’s no surprise that an industry that relies so heavily on information has adopted a number of consumer-grade apps to enhance their workflow. And while better than nothing, this practice can create more problems than it tries to solve.

In the analyst community, note-taking apps such as Evernote and OneNote now often serve as the foundation for the research process, in spite of the fact that neither were designed with analysts in mind. Why are these solutions being adopted? First, they are mostly an improvement over the ubiquitous network and folder structure. Second, they are fairly cheap and easy to use. But perhaps most importantly, they bypass internal IT operations that would otherwise express security concerns with such apps. While these solutions do offer an improvement over a network and folder topography, many times they are more like putting square pegs in to a round hole – they might fit, but you’re going to have to smash them in there pretty hard.

On the surface, consumer note-taking applications appear to be a good fit to manage the enormous amount of information—broker research, news, internal notes, SEC filings, call transcripts, etc.—that forms the basis of the fundamental research process. However, there are a number of instances where these generic apps fall short, and, ultimately, inject more problems into the research process than they solve.

Efficiency

Generic note-taking apps and investment research platforms both allow you to add content to their platforms from a variety of methods: web clipper, cut and paste and email forwarding for example. However, given the enormous amount of information that needs to be captured from a variety of sources and formats, using a system that comes pre-loaded with the most relevant content can significantly shorten the investment decision-making process, not by hours, but by days. Switching back and forth between content sources – SEC filings, broker research, transcripts, company presentations—is a significant waste of time and effort by an investment team member who’s skill set is best used to analyze and interpret information, not manage it.

Beyond qualitative content, embedded accessibility to quantitative information, like prices, financials, industry statistics, and trends, is an important component to maintain a holistic view of one’s investment thesis. This is a critical feature which no generic note app will ever be able to provide. In fact, most investment research platforms don’t provide it either. They’re simply empty shells that require the user to go through the painful process of populating the database themselves.  Platforms like ours, on the other hand, offer a full set of documents, news and research – already populated – while also providing the data and analytics that, together, form a singular investment research platform.

Security

One of the most glaring deficiencies in consumer grade apps is the lack of enterprise-level security. Considering the importance of the intellectual property of the investment team, understanding these shortcomings is of paramount importance. Evernote, for instance, is based on a multi-tenant configuration and uses standard AES-128 bit encryption. Given the sensitivity of research information, analysts need a higher encryption protocol, along with options for single-tenant and a virtual private cloud offering. Indeed, these configurable options allow for the security equivalent of an on-premise solution along with the cost and maintenance benefits of a cloud solution.

Last, but not least, management and compliance should have access to any and all information across the entire research platform via an administrative login or dashboard.  Because consumer-grade apps are not meant to house sensitive intellectual property, important compliance functions like this are not available.

Collaboration

In an investment team environment, it’s important to recognize the power of the collective intellectual capability of the team. Sharing knowledge efficiently not only increases the alpha potential, but also acts as an intellectual risk management tool. Ideas, theories and opinions can flow freely and efficiently across the entire decision-making spectrum, helping uncover ideas while avoiding landmines. However, simply sharing “notebooks,” as is the case with most note-taking apps, often creates more problems than it solves. This is because sharing large information sets requires the recipient to dig through a vast amount of information before reaching what’s most relevant. To say this is a waste of time is an understatement. A system that allows users to share specific elements within a notebook, like a chart or piece of annotated text, is immensely more efficient for everyone involved. Time, as they say, is money.

Accountability

Investment management is a performance-driven business. For a fundamental research-based portfolio, overall fund performance is based on the sum of its human parts and the tools that they use. With multiple views into the research process, management can increase transparency across the organization along with oversight into analysts’ recommendations. What is really needed, then, is a system that can easily record and highlight the decision-making process. In this way, the PM or Head of Research can quickly and easily ‘analyse the analyst,’ validating any investment recommendations being made.

Much like their corporate counterparts, consumer-grade apps like Evernote and Microsoft’s OneNote have found their way into the information-intensive investment research process. These applications do provide a basic, albeit limited experience with which to capture, organize, and share information.  However, the process of having to “fill’ these applications with external content, poor collaboration features, and lack of enterprise-grade security features is only a small step forward compared to an investment-specific research platform like Sentieo that can move the investment process forward by leaps and bounds.

*Note: While we believe consumer-grade note-taking apps are not the ideal research management solution, the Sentieo Notebook can integrate with those apps and support compliance recordkeeping needs for users already using them. Your organization’s notes, including those synced via our OneNote and Evernote plugins, are versioned, easily searchable and available via an API to be stored in your data vault.

The post Consumer-grade Apps Don’t Work For Equity Analysts appeared first on Sentieo.

Self-driving cars are approaching quickly. Google unveiled its self-driving project just four years ago, while Tesla shipped the first car with its famous auto-pilot feature just one year ago. Though impressive progress has been made, much more is needed before self-driving cars reach scale. In the meantime, there have been setbacks. Last May, the first person was killed in a car operating on auto-pilot, while Uber ended its San Francisco self-driving project after a week amid permit conflicts with the DMV, along with several sightings of its cars running red lights. (The project continues in Arizona.) Despite the inevitable bumps along the way, self-driving cars—also known as “autonomous vehicles”—will almost certainly become a reality within the next two decades, and their impact will be felt massively across the transportation and logistics industries, among others.

Mentions of Self-Driving Cars Increase by 8.5x in 2 Years

A search for “autonomous car,” “autonomous vehicle,” and “self-driving car” on Sentieo Document Search, shows that the number of references to self-driving cars is booming. The graph below shows the number of company press releases, presentations, filings, and broker research reports which mention these terms dating back to 2005. Though interest began appearing that year, mentions only started to gain pace in 2012. They took off in 2014 as the topic went from theory to reality. The search terms were mentioned in over 140 documents in January 2017 alone. Growth in mentions between 2014 and 2016 represent an increase of  850%. We expect the number of references to more than double in 2017 based on early data.

Source: Sentieo Document Search

With Smartphone Cycle as a Guide, Mentions Could Increase 32x over next 8 Years

If self-driving cars turn out to be as impactful as the proliferation of smartphones following the iPhone debut in 2007, there is still an enormous amount of room for growth. The graph below shows the monthly occurrences of documents mentioning “smartphone” and related terms since 2005 in Sentieo’s Document Search database.

Source: Sentieo Document Search

The first time “smartphone” appeared in 140 documents in a month, matching the current peak levels for self-driving cars, was in May 2009. The theme grew considerably afterwards and peaked seven years later in May 2016 with 4,404 documents, representing 32x growth over seven years. Shares of Apple rose 660% over that period while those of Nokia fell by 62%. If the smartphone cycle is any indication of how long and deep a successful cycle can be, there is still much more to come with self-driving cars, and many more opportunities to play the theme on the equity market.

Tech and Auto Dominate Attention, But the Insurance Industry is Catching Up

Slicing the data by sector shows that, predictably, the tech and automotive industries have paid closest attention to the self-driving phenomenon. Given tech’s role in pushing innovation around autonomous cars forward, along with the automotive industry’s clear susceptibility to such developments, this prominence isn’t surprising. That said, the automotive industry’s share of mentions is rising, from 26% in 2013 to 34% in 2016, indicating that prominent players are beginning to take the threat more seriously. (GM notably acquired self-driving startup Cruise Automation for $1 billion in 2016, for example.)

Source: Sentieo Document Search

Mentions of self-driving cars level off significantly outside of the tech and automotive industries, but one sector is starting to show notable interest: finance.

Insurers, which will be impacted heavily in the auto insurance industry, are responsible for this growth. As shown in the graph above, the number of mentions of self-driving cars in the financial sector is now higher than it was for tech and automotive in 2014, the year that Mobileye went public and car vendors began selling vehicles with advanced driver-assistance features.

Growth in the number of documents in Sentieo’s Document Search by Sector

Source: Sentieo Document Search

The timing of the uptick also matches the launch of Auto-Pilot by Tesla, which has prompted the insurance industry to assess the potential impact self-driving cars will have on its business model.

Many statements which we reviewed were dismissive, arguing that the extent and timing of adoption remains long-term and uncertain. Many statements are more bearish however, indicating anxiety ahead of the deep changes to come. Below is a sample of quotes from company transcripts and filing reports:

• Swiss Re, a Swiss reinsurer, has regularly mentioned self-driving cars as a major risk since a 2013. It sees a substantial reduction in the growth of the car insurance market, and argues that diversification will be key to survival. From their 2015 annual report: “Autonomous cars […] are […] a highly disruptive technology. […]Swiss Re held various events since 2013 with] experts from car manufacturing and technology, safety and legal specialists. […] this will present many new challenges to the way we do business and how we view and manage risk, retail insurance and liability. […] 1. Autonomous cars will improve safety; 2. The sharing economy will drive autonomous car adoption; 3. They are more climate-friendly and can reduce energy reliance; 4. Consumers will begin to embrace the technology; 5. Regulation and the law will adapt, slowly; 6. Cyber risk will increase; and 7. Autonomous cars will affect liability and tort cases. Although it is uncertain how legal and regulatory issues will play out, it is clear that our role as re/insurers will change considerably. Many of these changes will also create new opportunities for businesses who quickly adapt and diversify their products and services so as to target new market segments.”

Swiss Re: motor insurance market forecast (assumes 100% ADAS adoption and no inflation)

Source: SwissRe: The future of motor insurance (2015)

• Tryg, a Danish insurance group, describes the disruption from self-driving cars in its 2016 annual report: “Motor insurance accounts for a significant share of the non-life insurance market, and the insurance business therefore closely monitors how technical developments affect this area. With the development of the autonomous car, the motor insurance market is expected to shrink in the future. What exactly the impact will be on the insurance business remains an open question. So far, the development of more technically advanced cars has led to a reduction in the number of people who are injured in car accidents, but at the same time it is also clear that the more advanced cars are much more expensive to repair. Contrary to developments in motor insurance, other areas are expected to grow in the future. This goes, especially, for the insurance of people, pets and technology. Based on these developments, Tryg has been actively acquiring companies in these areas and developing new child insurance, pet insurance and cyber insurance products.“

• AON, the reinsurance broker, said in a report in September 2016 that Autonomous vehicles may reduce US motor premiums by -20% to over -40% by 2035-2050. However, “we as an industry need to act quickly to ensure that we have the products available to align to the new paradigm; if we fail to do so, we only invite disruption.”

• SOMPO Holdings, one of the top insurers in Japan, sounded more dismissive of the threat than its European peers in a May 2015 earnings call, although it conceded that a reduction in premiums is to be expected: “A world where we see 100% of the vehicles as self-driving cars on the road will not come. [However,] there are cars already available with safety driving assistance system, which receives some discount premium and we would probably have to apply something similar to that. […] So self-driving cars plus cars driven by people and totally manual cars. So three types of cars will co-mingle on the road and this co-mingle situation will continue for 10, 20 years [will support a smooth long term decline either than immediate change.]”

Methodology

This study is based on statistical analysis provided by Sentieo Document Search. Sentieo Document Search is an extensive database comprised of the filings of current and former publicly-traded companies. Searchable documents include S-1s, 10-Ks, 10-Qs, press releases, presentations, earnings transcripts and analyst reports. In total, the database holds more than 9.4 million documents. The search engine allows researchers to focus queries by sector, sub-sector, market-capitalization and other financial metrics. The tool also automatically provides results for synonyms and related queries where relevant. In this study, we focused on the theme of self-driving cars. Related search terms included “autonomous car” and “autonomous vehicle.”

The post Auto Insurance Voices Caution As Self-Driving Cars Near appeared first on Sentieo.