What Worked Japan - 25 Mar 2016 - Value was hurt and Size/Quality Benefited

What Worked While really nothing stood out last week, as for direction this week was only slightly better. There was a slight selloff in Value names and a move into Quality this week. Low FY1 PE names that did poorly were Kaken Pharma down 14%, Nippon Kayaku down 11% and DMG Mori down 10%. High ROE names that outperformed were COLORPL up 15%, Kakaku.com up 11% and Matsumotokiyoshi up 8%. Negative momentum looks to be one of the  strongest factor currently driving the market.

Names that went down over the last year continued to go down this week. Sharp was down 12% after being down 41% over the last year, Nippon Kayaku was down 11% and Sumco was down 9%. We also saw a move into Retail names and a slight move away from high Beta and large-cap names. High Retail names that did well were Kokuyo up 10%, OKI Electric Industries up 8% and Tsuruha up 8%. High Beta names that were hurt were Seiko Epson down 9% and Unipres Corp down 8%.

Who Moved Only 15 names moved on volume this week and the majority of the names were down. Only three of the fifteen names move up on volume this week. Morinaga Milk was up 10%, Sangetsu was up 4% and Sumitomo Forestry was flat on the positive side. On the other side, Kaken Pharma was down 14%, Nippon Kayaku was down 11% and NOF Corp was down 5% all on strong volume.

Summary

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When Analysts are confused Price Volatility increases

With Earnings Season just right around the corner we looked for names where there is a high standard deviation in Analyst Estimates. Basically which Companies have analysts estimates all over the place. We then looked back over the last 4 years to see how those “confused” names performed and what happened to volatility over the three months from March 24rd. Aside from last year when there was only a 6% difference in volatility in quintile 5 (highest standard deviation) vs. quintile 1 (lowest standard deviation), quintile 5 volatility was 30% higher than quintile 1 volatility in the previous 3 years.

As you would expected with higher volatility, comes bigger return but positive and negative. Quintile 5, outperformed Quintile 1, three out of the last four years. However in 2012 it was down 16% relative to only 7% for quintile 1. Below I have attached the returns and volatility for the different quintiles.

Quintile Summary

For this season we have highlight names that have a large dispersion of Estimates. We screened for names that 1- five or more Analyst cover the Company. 2- Mkt-Cap above ¥100bn and current FY1 EPS divided by Standard Deviation is greater than 30%. For the ones with the largest standard deviation, they look to have had recently significant declines in EPS forecast over the last couple of months. In the attached file we have also included the historical number for each Company.

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