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Primary Article

In Search of Certain Earnings

Applying the ACE Portfolio Concept to Sectors

James L. Grant and Chris Rowberry
The Journal of Investing Summer 2008, 17 (2) 35-46; DOI: https://doi.org/10.3905/joi.2008.707216
James L. Grant
President of JLG Research and a finance professor at the University of Massachusetts in Boston, MA.
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  • For correspondence: jim@jlgresearch.com
Chris Rowberry
A senior vice president at Thomson Reuters StockVal in Phoenix, AZ.
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  • For correspondence: chris.rowberry@thomsonreuters.com
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Abstract

Sector composites that have highly stable earnings streams allow the portfolio manager or analyst to derive “earnings certain” sector risk premiums. ACE (approximately certain earnings) sectors represent such baskets. Because sector pricing is influenced by earnings variability, obtaining risk premiums from standard sectors is contaminated. With knowledge of an EPS stability measure, a composite engine, and a robust DCF framework, we can discover companies within each sector that exhibit highly stable earnings. In practice, ACE sectors can be used to derive current/historical “earnings certain” sector risk premiums, enhance sector rotation strategies, obtain sector-implied growth rates, make risk adjustments for present value modeling, and construct improved valuation benchmarks.

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The Journal of Investing
Vol. 17, Issue 2
Summer 2008
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In Search of Certain Earnings
James L. Grant, Chris Rowberry
The Journal of Investing May 2008, 17 (2) 35-46; DOI: 10.3905/joi.2008.707216

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In Search of Certain Earnings
James L. Grant, Chris Rowberry
The Journal of Investing May 2008, 17 (2) 35-46; DOI: 10.3905/joi.2008.707216
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