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This product is based on relative fundamental analysis of US financial institutions: Bank of America (BA), Citigroup (C), Bank of New York (BK), Goldman Sachs (GS), JP Morgan (JPM), Morgan Stanley (MS). Every institution is a big bank-issuer, the stocks of which trade on exchanges NYSE/NASDAQ. The main financial indicators from financial reports (profitability, revenue, book value of stocks) are of limited relative value – they differ significantly from industry to industry. These indicators can be used for conducting objective valuations for only issuers belonging to the same industry. This product is based on the analysis of the financial sector of the USA.
The following indicators will be considered as the main criteria:
Comparison of this two ratios allows to evaluate the profitability (effectiveness) of the company – the ratio of the average annual earnings per share to the book value per share – E/PB. Let us consider two groups of stocks, highlighted in grey and green in the table below. The relative weights in each group are determined on the basis of issuers’ profitability. Since the weights in each group comprise 100% it can be stated that each group’s business is comparable in terms of profitability level – the group’s response to industry fundamental factors must also be comparable for the period under consideration.
|Bank of America||13.01||13.01||5.07||26.33|
|Bank of New York||14.42||1.19||8.25||42.83|
We suggest to use this idea for long term trading strategy for a product composed on the basis of PCI GeWorko model. In the base part of the product we placed stocks of three companies: Bank of America (26.33%), Bank of New York (42.83%), Goldman Sachs (30.84%). Investment weights are indicated in parentheses in percentages. The quoted part is comprised of stocks from the second group: JP Morgan (43.13%), Morgan Stanley (27.40%), Citigroup (29.47%). The purchase transaction for the product will correspond to the purchasing of the base part and selling of the quoted part for the equivalent amount.
The trading strategy for the product is based on the analysis of its price range that is the ratio of the values of the base and quoted parts at different points in time. We believe the historical range of price fluctuations (using annual indicators for analysis) will remain unchanged during the next quarter. At the moment it has edged close to the annual minimum. This makes it possible to consider the product as undervalued at this price and use the opportunity to buy it: buy the stocks of the first group and sell the second group of stocks. In the last two years the minimal price of the product fell to the 0.94631 level, which can be used for risk control. In this case the ratio of the maximal profit at the upper bound of the range is more than twice the risk.
Recommended horizon: three months
Recommended amount: > $2000
Stop loss: 6% of the capital or the level 0.94631
Additional signals: monthly analytical reports