RT Journal Article
SR Electronic
T1 In Search of Certain Earnings
JF The Journal of Investing
FD Institutional Investor Journals
SP 35
OP 46
DO 10.3905/joi.2008.707216
VO 17
IS 2
A1 James L. Grant
A1 Chris Rowberry
YR 2008
UL https://pm-research.com/content/17/2/35.abstract
AB 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.TOPICS: Security analysis and valuation, factors, risk premia, portfolio construction