By Justin Carbonneau (@jjcarbonneau) —
In our recent podcast with Ray Micaletti, we talked about his relative sentiment approach to investing. Ray uses retail and institutional investor sentiment to build quantitative investment strategies. That conversation, along with our talk with value investor Cole Smead and his comment on insider buying, got me thinking about the various company specific sentiment factors investors can use in their stock analysis.
Here are four ways to gauge investor sentiment quantitatively.
1 – Analyst Buy & Sell Recommendations
Wall Street analyst buy and sell recommendations are an indicator of investor sentiment from professionals who making a living analyzing companies. These recommendations are given by analysts who study a company’s financial performance, management, and market trends. Based on their research, they provide their opinions on whether a stock is a good buy, hold, or sell based on their outlooks for the companies
As an investor, you could analyze a number of data points when it comes to Wall Street buy and sell ratings.
- How many buys vs. sells;
- The percentage increase / decrease in analyst coverage and bullishness or bearishness over time;
- The percentage of sells or uptick in sell ratings (research I’ve seen shows that using sells as a negative screen can help avoid stocks with major risks).
I pulled analyst buy/sell ratings for the 500 largest stocks in the market on 12/31/2021, 12/21/2022 and as of today and scanned the data to see if I could highlight some specific examples. Companies like Tesla, Exxon and Oracle have seen an increase in the total buy rating over the past 12 months while Intel has seen a fall in the number of buys and rise in the number of sells.
|Rating||Buys | Sells||Buys | Sells||Positive | Negative|
|Tesla (TSLA)||22 | 14||29 | 6||Positive|
|Exxon (XOM)||12 | 3||17 | 1||Positive|
|Oracle (ORCL)||6 | 3||16 | 3||Positive|
|Intel (INTC)||18 | 8||9 | 12||Negative|
We can also use the data to see which companies have a higher-than-average percentage of sell ratings out of the total analyst ratings. Since Wall Street analysts mostly issue buy ratings, sell ratings are far less prevalent, but when issued this means analysts feel strongly about their bearish stance on a stock. Some of the names in the table above, including Tesla and Intel may have seen an uptick in analyst buy ratings, but both have an above average percentage of sell ratings with Tesla having 63% and Intel at 44%. A few others that jumped out.
|Stock||# of Buys||# of Sells||Percentage of Sell Ratings|
|Texas Instruments (TXN)||9||3||25%|
|Illinois Tool Works (ITW)||5||3||38%|
|Southern Cooper (SCCO)||11||3||27%|
2 – Insider Buying & Selling
Buying or selling of stock by corporate insiders, such as executives or directors of a company, can serve as an important measure of investor sentiment and their outlook on the business. When corporate insiders buy shares of their own company, it is seen as a vote of confidence in the company’s future prospects and potential for growth. Insider buying can act as a signal to the market that the company’s leadership believes the stock is undervalued and has the potential for future gains. If insiders are selling, it may signal problems at the company that aren’t yet reflected in the fundamentals, but insiders sense trouble is ahead. We had Wharton Professor Daniel Taylor on the podcast talking about corporate insider trading and some of the challenges around this topic, but as Cole Smead said on our podcast, a big purchase from a top insider is the most important signal he looks for.
Investors can use publicly available insider data to see which companies have, or are gaining (or losing), support from insiders. There are two simple things you can look for – one companies with very high insider ownership, and two, companies that are seeing the trend in insider ownership increase (or decrease).
High Insider Ownership Companies
|Stock||Percentage Owned by Insiders|
|Berkshire Hathaway (BRK-A)||43%|
|Charter Communications (CHTR)||33%|
|Monster Beverage (MNST)||29%|
Companies Seeing Increasing Insider Ownership Trends
|Marriott International (MAR)||16.5%||18.5%|
|Public Storage (PSA)||9.9%||13.6%|
|Las Vegas Sands (LVS)||46.2%||56.8%|
3 – Company Share Buybacks
Share buybacks, also known as stock buybacks, are a way for companies to buy back their own shares from the market, and they can serve as a measure of investor sentiment. When a company buys back its own shares, it is seen as a signal of confidence in the company’s financial stability, future prospects and indicates the company executives and Board of Directors thinks its share are undervalued.
Share buybacks can have multiple benefits. One is they increase earnings per share, as reducing the number of outstanding shares can increase that figure. Buybacks are also a way to return capital to shareholders and improve the company’s stock price by increasing demand for the stock. Buybacks have become somewhat controversial and entered the political sphere in recent years, but they remain an important way companies use cash and provide another important sentiment metric we can mine for interesting opportunities and trends.
Looking for companies with falling share counts is one way to identify companies that are buying back shares.
|Stock||Change in Share Count (2021 vs. Today)|
|Chesapeake Energy (CHK)||-6.9%|
|State Street (STT)||-4.9%|
|Arrow Electronics (ARW)||-4.4%|
4 – Stock Price Momentum
Stock price momentum and indicators such as relative strength and intermediate price momentum are measures of investor sentiment in the stock market. Momentum refers to the current direction and rate of change in a stock’s price, and is a key indicator of how investors are feeling about a particular stock. A stock with positive momentum suggests that investors are optimistic about the stock’s future prospects and are buying into the stock. A stock with negative momentum, suggests that investor sentiment is negative and investors are selling the stock.
Momentum may be the cleanest and the ultimate investor sentiment indicator as a strong (or weak) stock price means investors of all types are buying (or selling) the shares in the market. Buying the very strong momentum stocks and avoiding the very worst scoring momentum stocks is one-way investors can harness this in an investment strategy. Using the tools on Validea, we can scan for the strongest momentum using various momentum indicators.
|Company Name||Ticker||Relative Strength||Momentum Percentile||Fund Momentum Percentile||6 Month Relative Strength|
|NINE ENERGY SERVICE INC||NINE||99||1||84||99|
|TARGET HOSPITALITY CORP||TH||99||1||75||76|
|RHYTHM PHARMACEUTICALS INC||RYTM||99||1||75||90|
|TRANSMEDICS GROUP INC||TMDX||99||1||75||93|
|VERONA PHARMA PLC – ADR||VRNA||99||1||75||96|
|ARDMORE SHIPPING CORP||ASC||99||1||33||96|
|MADRIGAL PHARMACEUTICALS INC||MDGL||99||1||75||99|
|CABALETTA BIO INC||CABA||99||1||75||99|
|SCORPIO TANKERS INC||STNG||99||1||16||93|
More to Come on Sentiment
Of course, there are other ways to measure sentiment – news analysis, earning calls, social media, search trends and investor surveys, but my focus is on using the insider and company specific data we have access to here at Validea and mining that data for interesting stats. In my next article I plan on expanding on this idea of using investor sentiment and combining some of these factors with other investment criteria found in the models we run here at Validea.