.png)
What is the issue? One would assume that companies in the same sector or subsector have high correlations in organic growth. We take a look at 100+ companies in 9 subsectors within the US Industrials/Materials sectors that @AKANOMICS INC tracks. Our analysis disproves this assumption.
Why is this relevant? It is relevant for fundamental analysts trying to read the tea-leaves from one company’s earnings release to parlay into the implications for other companies yet to release their results.
What can one do? Analysts should focus instead on the implications for those companies which have exposure to the same industries. And further on the specific segments with the highest exposure to the same regional businesses/industries. And know that such companies could fall in other subsectors.
How can one do this? Quantitative relationships between companies/segments can be unearthed through correlations between the organic growth of two companies/segments. Fundamental relationships between companies/segments can be understood through their regional business/industry exposures – the triumvirate of the product industry, the client industry, and the region. And combining these two approaches can expose “quantamental” relationships between companies/segments that are quantitatively strong, and fundamentally defensible.
What are some examples? We looked at 109 US Industrials/Materials companies we track, for which we have created historical organic growth data at the company as well as segment level. These 109 companies were bucketed into 9 subsectors – Machinery, Distributors, Auto Parts, Paper & Packaging, Electrical Equipment & Multi-Industry, Chemicals, Building/Construction, Transportation, and Steel. AKAnomics analysis shows that among these 9 subsectors, only two sub-sectors have high aggregate correlations* (above 65%) between companies of the subsector – namely Steel and Transportation. The aggregate correlation between companies of two different sub-sectors** is also quite low (10-25%).
However, several “quantamental” relationships emerge when considering the group of 5 companies (among the 109 we track) that announce their results in the first week of the release cycle (FAST, JBHT, CSX, PPG, SNA). First up are the 17 relationships that include intra- and inter-subsector relationships.
Stripping out the intra-subsector relationships within the transportation subsector points to 4 strong relationships:
Follow-up? Feel free to drop us a line if you would like to learn further, or chat about AKAnomics Inc’s product offerings (www.akanomics.com).
* Aggregate correlation is the average correlation between the sequential change in organic growth for each pair of companies within the subsector
** Aggregate correlation is the average correlation between the sequential change in organic growth each pair of companies, one from each subsector
Source: AKANOMICS INC, 04/15/2024
