Tuesday, August 22, 2017

Event-study strategy.

An event-study is a statistic method applied to the financial markets that has the purpose to measure the relevance/irrelevance of an event on the stock prices ; in other words, we value if an event is or is not price-sensitive, "over the normal returns", calculated by a market model through the following regression : 

R(stock) = α + β*R(benchmark)

R are the returns, expressed as a percentage, respectively of a single bond (the subject of the analysis) and of the benchmark (a market index).

α is the intercept.

β is the slope. 

An Event-study strategy has the aim to :
  • value the relevance of an event (like the earnings releases, like a particular press release, like a macro-event and so on) ;
  • value the impact and the statistical significance of the event ;
  • measure the market moves of the insiders and the market mood, at the time of the event ;
  • by combining the previous aspects, it means to make profitable a trade just buying or just selling the stocks (it depends on the specific situation) a moment before the event (some days, a week or a month before).  
The success of the strategy is not absolute but it is very true as the event is significative and repeatable. As known, the market is unpredictable and facing the same news, we could have a different market reaction. 

The following case shows the strategy. We speak about the full year 2016 results of Moncler S.p.A. The press release is dated 28, February 2017.

As the theory says, it needs to create a "window" in three parts :
  1. Estimation window, useful to build the regression (usually, it is a period of 252 days) ;
  2. Event window, the window of the event (it is a period of 6 days, 2 days before the event, the day of the event, and 3 days after the event, to cover any delays or news leaks) ; 
  3. Post-event window, useful to value the impact of the event in the following days.
In this way, we can build the regression : we take the historical returns of the stock (Moncler, Y) and of the market index (FTSE-mib, X). The regression is shown in the following image. 

The parameters of the regression are the following (see the table).

For the returns (change %), I used the historical data from Investing.com and I put them on a spreadsheet. 

The estimation window is the period from March 3, 2016 to February 23, 2017 (in the image, there are some hidden cells, for space requirements).
The event window is the period from February 24, 2017 to March 3, 2017. 
The post-event window is the period from March 6, 2017 to March 31, 2017.

With the regression, we measure the abnormal returns (AR). 
The formula of the abnormal returns is :

(Effective return of the stock - Estimated return from the market model).

The estimated return is equal to [α + β*(effective return of the market index)].

The AR test t is : AR / STD.ERR.(YX).

To understand if the AR is significative and so if the event is price-sensitive, it needs to measure the statistic significance of the AR : is the absolute value of the AR test t is greater (YES) or less (NO) than 1.96 ? 

Abnormal returns (AR) in the event window

We can conclude that the earnings release impacted positively on the stock prices and that the event was significative. Just buying before the event, betting on the publication of good data, it would have been profitable. The following image shows the candlesticks chart of the event. 

Chart from Investing.com

As I previously said, the good success is basically based on the repetition of the event and the importance of the event itself. It means also that there is the same market reaction in every occasion (it is not so obvious). 

With Moncler, there are many aspects that confirm this, see the following link :

Tuesday, August 15, 2017

Moncler S.p.A. : cash flow statement analysis.

Here we have the consolidated cash flow statement of Moncler (full year 2016 results). 
For further info, we can consult the following link (investor relations) :

Consolidated cash flow statement

I will produce a detailed analysis of the cash flow statement with the aim of understanding if : 
  1. The firm has a great financial balance ;
  2. The core business is able to support the other areas (as it should normally be), investing and financing activities. 
At a glance, we can notice that the core business (operating activities) generates cash flow (+383,664). It is very important for a functioning business. If a firm absorbes cash flow from operating activities, it is not vey good. Substantially, it is a poor business. 
However, the investing activities and financial activities absorbe cash flow. A functioning firm should invest to grow (like Moncler with a negative cash flow from investing area > purchase of tangibles and intangibles fixed assets > -63,301). The financing area should generate cash flow (positive cash flow), to support the business and to grow, following the foregoing reasoning. Instead, the firm prefers repaying the debts (repayment of borrowings, -68,592). 

To summarise, the cash flow from operating activities should be positive and able to cover the financial needs from the other business areas. We are in a great situation with a positive cash flow from the core business and big enough to offset the cash outflows from the other activities. 
We are in a bad situation with negative cash flow from the operating activities and the other areas are not able to generate adequate cash flow to cover the cash outflows from the other business areas. 

The following table and the following  pie chart is very exhaustive. At the same time, Moncler presents a great financial balance and a core business capable to support the areas that absorb cash flow. Indeed, the total net cash flow is positive (a+b+c) and the percentage of the cash flow from operating activities compared to the percentages of the other areas is greater than 50%. There is also an improvement if we look at the fiscal year 2015 and at the fiscal year 2016 : from 54% to 61%.

Table of the cash flows and compared pie charts

To conclude, it is useful to calculate two ratios : revenues monetization index (also known as monetary ROS) ; EBIT liquidity index. The formulas are the following. 

Monetary ROS : Cash flow from operating activities / Revenues.

EBIT liquidity index : Cash flow from operating activities / EBIT.

The following chart shows the compared analysis. For the EBIT, I used the EBIT adjusted, due to the non-recurring items. 

Cash flow statement ratios

The two ratios are very good, as a percentage. The cash flow from operating activities represents the 27% of the revenues and the 88% of the EBIT. There is also an improvement from the full year 2015 to the full year 2016.