Visa Inc. (V) Under the Quant Eye as GP Reaches 0.371607

Investors interested in quality ratios for Visa Inc. (V) should take a good look at the Gross Profitability of the stock. Robert Novy-Marx, a professor at the university of Rochester, discovered that gross profitability – a quality factor – has as much power predicting stock returns as traditional value metrics. He found that while other quality measures had some predictive power, especially on small caps and in conjunction with value measures, gross profitability generates significant excess returns as a stand alone strategy, especially on large cap stocks.The Gross profitability for Visa Inc. (V) is 0.371607.

Stock market investors are typically searching for solid quality companies to help boost the portfolio. There are plenty of quality companies out there, the tricky part may be determining what constitutes as quality. Many investors look for companies that are solid sales leaders within a market that is growing. Going further, investors may be studying a company’s proven track record and gauging the competence of current management. Adding other factors such as brand recognition and prospects for steady growth, investors may eventually find a company that is worth taking the risk for future returns.

Professor Novy-Marx’s key insight was that you don’t need to go further down the income statement as these numbers may get manipulated with accounting tricks. To identify really profitable firms, one should look at the top line, not the bottom line. In one of his papers, Novy-Marx compares gross profitability to the other most famous strategies such as Greenblatt magic formula, Piortoski F-Score, etc.

Stock market investors are typically searching for solid quality companies to help boost the portfolio. There are plenty of quality companies out there, the tricky part may be determining what constitutes as quality. Many investors look for companies that are solid sales leaders within a market that is growing. Going further, investors may be studying a company’s proven track record and gauging the competence of current management. Adding other factors such as brand recognition and prospects for steady growth, investors may eventually find a company that is worth taking the risk for future returns.

Total Asset Growth

In their 2008 paper, professors Cooper, Gulen and Schill provided evidence that a firm’s assets growth rates are strong predictors of future abnormal returns.

“The findings suggest that corporate events associated with asset expansion (i.e., acquisitions, public equity offerings, public debt offerings, and bank loan initiations) tend to be followed by periods of abnormally low returns, whereas events associated with asset contraction (i.e., spin-offs, share repurchases, debt prepayments, and dividend initiations) tend to be followed by periods of abnormally high returns.” – Cooper, Gulen & Shill in Asset Growth and the Cross-Section of Stock Returns. In a study on US data during the period 1967-2007, they find that:

– A hedge portfolio rebalanced annually that is long (short) the stocks of companies with the lowest (highest) percentage growth in total assets over the previous 12 months generates an average annual return of 22%.
– This asset growth effect is stronger for small capitalization stocks, but is still substantial for large capitalization stocks.
– The effect is strongest in the month of January.
– Asset growth rate retains large explanatory power for future stock returns after accounting for firm size, book-to-market ratio and momentum. In fact the asset growth effect is at least as powerful in explaining returns as these other widely used factors.

We calculate asset growth as follows:

Total Asset Growth = (Total AssetsTotal Assets y-1) − 1. Visa Inc. (V) has a total asset growth number of 0.030422.

Net Debt to Market Cap

This ratio gives a sense of how much debt a company has relative to its market value. Companies with high debt levels compared to their peers can be volatile. We calculate it as follows:

Net Debt to Market Cap = (Total Debt−Cash and ST Investments) / Market Cap

Visa Inc. (V) has a net debt to market cap ratio of 0.676171.

Altman Z Score

Visa Inc. (V) has an Altman Z score of 8.390155. The Z-Score for predicting bankruptcy was published in 1968 by Edward I. Altman, who was assistant professor of finance at New York University at that time. It measures the financial health of a company based on a set of income and balance sheet values. The Altman Z-Score predicts the probability that a firm will go bankrupt within 2 years. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years before the event. In a series of subsequent tests, the model was found to be approximately 80%–90% accurate in predicting bankruptcy one year before the event

Atman built the model by applying the statistical method of discriminant analysis to a dataset of publicly held manufacturers. Since then he has published new versions based on other datasets for private manufacturing (Z’-Score), non-manufacturing, service companies and companies in emerging markets. (Z”-Score)

Please also note that the original dataset used was quite small and consisted of only 66 firms of which half filed for bankruptcy. All companies were manufacturers and small firms (total assets less than $1m) were removed.

Stock market investors are typically searching for solid quality companies to help boost the portfolio. There are plenty of quality companies out there, the tricky part may be determining what constitutes as quality. Many investors look for companies that are solid sales leaders within a market that is growing. Going further, investors may be studying a company’s proven track record and gauging the competence of current management. Adding other factors such as brand recognition and prospects for steady growth, investors may eventually find a company that is worth taking the risk for future returns.

VC3

Value Composite Three (VC3) is another adaptation of O’Shaughnessy’s value composite but here he combines the factors used in VC1 with buyback yield. This factor is interesting for investors who’re looking for stocks with the best value characteristics, but are indifferent to whether these companies pay a dividend.

VC3 is the combination of the following factors:

Price-to-Book
Price-to-Earnings
Price-to-Sales
EBITDA/EV
Price-to-Cash flow
Buyback Yield

As with the VC1 and VC2, companies are put into groups from 1 to 100 for each ratio and the individual scores are summed up. This total score is then put into groups again from 1 to 100. 1 is cheap, 100 is expensive.

The scorecard also displays variants of the VC3 where the score is calculated for the selected company compared to peer companies in the same industry, industry group or sector.

Please note that we use Book-to-Market instead of P/B since it allows a more accurate sorting compared to P/B. Stocks with a high B/M show up at the top of the list, stocks with negative B/M are at the bottom of the list. For the same reason we use Earnings-to-Price instead of Price-to-Earnings and Cash flow-to-price instead instead of Price-to-cash flow.

Also important is that we always make sure that companies with the same score get added to the same percentile. For stock universes where the number of stocks is less than 100, we make sure that the stocks are still allocated to percentiles from 0 to 100 instead of 0 to the total number of stocks. This is particularly relevant for the industry, industry group or sector variants where if additional filters are used, the number of stocks often drops below 100.

Visa Inc. (V) has a VC3 of 59.

With the stock market trading at current levels, investors may be tossing around ideas about how to trade the next few quarters. As we slip further into the second half of the year, investors may be assessing the latest earnings reports and trying to calculate the future prospects of certain stocks. Finding bargain stocks at current levels may be much harder than spotting hidden gems when markets are down. Plowing through the fundamentals may help sort out some of the questions that investors may have that come along with trading at these levels. Investors may have to do a little more homework in order to identify that next great trade, but the rewards may be well worth the extra time and effort.

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