EQUITY RESEARCH GUIDE:

How to Deliver Alpha Without Spending Millions on Data Science Projects

14 STOCK PICKS FOR H1 2020

Today there is almost unlimited data available. From SEC filings to IR presentations, and even Twitter engagement data, it is increasingly difficult to find uncharted insights to drive a differential investment thesis without spending millions on data science projects.

Incorporating alternative data into the equity research workflow empowers analysts to pick up digital breadcrumbs and turn them into signals. By enabling analysts to seamlessly extract relevant data to drive insights, create a thesis, and collaborate with colleagues, this approach turns productivity into a competitive edge.

Our bi-annual “Stock Picks” report demonstrates the power of embedding alternative data directly into the research workflow. We first put this to the test in January 2019, when we used Sentieo to publicly pick 11 stocks. Halfway through the year, these 11 long ideas returned an average (mean) of 60%, compared to the leading S&P 500 index ETF at just under 20% YTD (its best H1 performance in two decades).

The H1 2020 edition highlights 14 new picks and takes a look back at our 2019 picks, why we selected them, and how they’re doing today.

We hope you enjoy it!

Alap Shah CEO and Co-Founder Sentieo

INTRODUCTION

Using Alternative Data to Deliver AlphaHOW TO PICK UP DIGITAL BREADCRUMBS & TURN THEM INTO SIGNALS

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To choose our stock pics, we use a combination of fundamental analysis along with alternative data from our platform and broad “themes”. Starting with a wide breadth of stocks, we hone the list down to our top picks using alternative data to help draw out uncharted insights. To narrow the list we look at the following themes:

• High-growth industries• Long-term secular megatrends• Industry leaders• Good price to growth rate ratio• Strong revenue growth

Using Sentieo’s Mosaic feature we plot the data, looking for:

• A high correlation between the alternative data composite and revenue growth and/or KPI

• Large acceleration in the alternative data (our proxy for end-user demand) versus the consensus expectations

To learn more about the alternative data integrations that make this possible, watch “13 Stock Picks for H2 2019”.

METHODOLOGY

Our ApproachHOW WE SELECT OUR STOCK PICKS

Next, we combine this alternative data analysis with our team’s 60+ years of collective fundamental, qualitative investing experience. We don’t adhere to a singular investment style, however, we do look for revenue growth as the most important driver of long-term results.

To learn more about the alternative data integrations that make this possible, watch “13 Stock Picks for H2 2019”. We take several individual data sets (search trends, web traffic measurements, Twitter mentions) and combine them into a unified index in the most predictive combination for revenue growth, stock price, and, in some cases, KPIs, like same store sales.

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Review of H2 2019 PicksRETROSPECTIVE ON OUR H2 2019 LONG IDEAS

In 2019 we used Sentieo to select 24 stock picks. The first 11, published in early January 2019, returned an average of 60% by July against the SPY gain of 20%. In July 2019, we added 13 more stocks to the list. As of January 2020 the H2 13 picks have performed slightly better than the SPY total return, returning an average of 8.42% from the publication date, July 16, 2019, to December 31, 2019, versus an 8.39% total return for the SPY ETF for this time period.

Below is a breakdown of how each of these picks performed.

Long ideas we had for H1 that we still liked for H2 2019

CROX (+85.5%)What we said: CROX was our only pick from January with negative returns but we still liked it for H2; transitory first half issues, multiple expansion to be expected.

What happened: CROX had a great second half of the year, hitting on all cylinders (including a drastic reduction of China-sourced product for the US, and big new collaborations).

LULU (+21.8%)What we said: the athleisure leader has substantial upside in men’s and international; solid alt data metrics.

What happened: LULU raised guidance for three straight quarters through 2019, powered by solid comp store, men’s and international growth.

ROKU (+19.6%)What we said: we believed that ROKU will be a winner in both OTT, as a “neutral” platform, and in international; also a possible acquisition target.

What happened: ROKU had another double-digit gain since the H2 list publication but there are more questions now around the future growth trajectory.

CMG (+9.9%)What we said: strong execution to continue; digital transformation (ordering/delivery) on track; upside to comps based on our data.

What happened: CMG continued to execute, with very strong (double-digit) comp store sales, and ever-growing digital business.

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TWTR (-15.6%)What we said: improving “health of the conversation”, strategic asset, crowded US primary elections, sports.

What happened: while user growth continued, the company had a major glitch in its mobile ad tech, leading to a revenue miss, and a stock drop after the Q3 earnings.

TREE (-27.6%)What we said: a business model now diversified well beyond mortgages benefiting from the channel switch to online shopping for financial products, along with tailwinds from mortgage refinancings.

What happened: TREE the stock had a great H1; H2 was a different story: while revenues grew above expectations (including sequential growth in mortgages), margin compression from investment initiatives weighted on the stock.

H2 2019 picks

RH (+68.6%)What we said: transformation into “one of a kind” retailer, solid e-commerce player, high short interest, undemanding valuation.

What happened: sustained strong operating performance and a more detailed future vision drove the shares higher.

SNAP (+8.9%)What we said: DAU (Daily Active Users) acceleration due to the new filters, improved ad product, improved engagement, multiple expansion.

What happened: revenue and DAU growth came in ahead of expectations, however, the company’s Q4 guide was seen as underwhelming; questions around TikTok linger.

COUP (+4.5%)What we said: very long runway and accelerating network effects for the B2B spending management, and our alt data indicated better than expected revenue growth.

What happened: COUP continues to fire on all cylinders (revenues and booking above consensus); however EV/Sales multiple compression in the sector kept the shares flattish.

PLNT (-3.7%)What we said: the discount gym franchisor has a good moat with several levers for growth, and PLNT’s revenue for Q3 will surprise to the upside.

What happened: PLNT had two solid beats (August and November) since then as well as a debt refinancing; however, the stock did not perform as we had expected.

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WIX (-12.3%)What we said: we saw upside to the free-to-paid conversion rates for the website provider, along with room for multiple expansion.

What happened: our view was based on the Q3 subs (that came in with a nice beat); however the Q2 results and pricing flowthrough questions weighted on the shares.

GPRO (-20.5%)What we said: we were bullish on the new HERO7 driving units and ASPs up, as well as the $4.99/mo storage.

What happened: HERO7 performed well and the company increased H2 sales guidance initially; however, the HERO8 delay was unexpected, and the shares remained volatile.

DBX (-29.6%)What we said: value-added services and pricing will lead to strong revenue growth, we also saw room for multiple expansion.

What happened: while DBX had very solid results vs. consensus in Q3, plenty of skepticism remains in the marketplace; the CEO made a large (~$10 mm) insider purchase in November.

H1 2020 Picks

LULU

MEGATRENDS: Health & Wellness, Athleisure, Technology in Clothing

Yoga/casual apparel company Lululemon (LULU) was one of our H1 and H2 long ideas for 2019, and it’s back for 2020. Our bull case has not changed: the alternative data index for revenues continues to be better than Street expectations, and execution has been flawless across our target areas (core, men’s, international). We continue to see strong revenue and earnings estimates revisions, indicating good business momentum. While the stock is at around 41x P/E for FYE Jan 2021 (about 30% premium against the large players in athletics, like Nike and Adidas), we get much better revenue growth (high teens for the year, in our estimate, vs. 15% Street).

View the Interactive Chart

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CROX

MEGATREND: Casual Wear

Casual footwear company CROX was one of our H1 and H2 long ideas for 2019, and it’s also back for 2020. After overcoming some company issues in H1 2019, the company had an outstanding H2, more than doubling its June 2019 numbers. We are seeing excellent revenue and earnings estimates revisions, with solid alternative data index vs. expectations for revenue growth in the current quarter. The stock now trades at around 21x P/E for FYE Dec 2020: while there has been some multiple expansion since the summer, we still see room to run towards the premier names in footwear, all at 30x and above (for Nike, Adidas, Puma, Under Armour, Asics).

View the Interactive Chart

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SNAP

MEGATREND: Social Media Ad Growth

SNAP, like CROX and LULU above, is another returning idea from H2. We are seeing a continued positive trend in the closely watched KPI, Daily Active Users (DAUs): our H2 thesis was based on the newly released filters. We also think that SNAP can continue to benefit from its younger audience skew and the need for social media ad alternatives outside of the FB/GOOGL “duopoly.” We are seeing improving revenue estimates revisions, while valuation, on an EV/Sales basis, remains below the post-IPO mean.

View the Interactive Chart

COUP

MEGATREND: Cloud

COUP is the final “returning” long idea, and our thesis is unchanged. COUP is a cloud company in the B2B “spend management” space: procurement, invoicing, expensing, budgeting, and similar tasks. COUP has a very long runway with adding news services for its core enterprise clients (where it acts as a replacement for legacy vendors, like SAP), as well as white space in international and under-penetrated verticals, like federal government. While the company trades at over 20x EV/Sales for FYE Jan 2021, we are seeing continuous upwards revisions in the revenue trajectory.

View the Interactive Chart

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HELE

MEGATREND: Health & Wellness

Helen of Troy (HELE) is a diversified household products company (owner of the popular Hydro Flask bottles, OXO kitchen products, household and beauty appliances). We are seeing excellent YoY alternative data trends in both search and web traffic for its major brands through the end of 2019: this was confirmed by the very solid sales and earnings beat in early January. Additional positive catalysts include the recent Drybar prestige haircare appliance brand acquisition (brand-licensed salon locations in Ulta, Sephora, Nordstrom).

View the Interactive Chart

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AAPL

MEGATRENDS: Smart Phones, Wearables

AAPL “surprised everyone” in 2019 by surging from around $150 (after a profit warning in late 2018) to nearly $300 by year-end. While the stock is very extensively covered, we are seeing very strong alternative data around Air Pods, for example, with both Twitter mentions and search interest moving up sharply into the holiday season. We also like the “consensus” bull thesis: product cycle, services/cross-integration, and we think we will see some (additional) multiple expansion in 2020 and EPS revisions acceleration.

View the Interactive Chart

PCTY

MEGATREND: Cloud

We see HCM (Human Capital Management) software suite provider Paylocity (PCTY) doing well in 2020, with several tailwinds. PCTY has a large TAM in its SMB space (with good growth in the dynamic, new job creating smaller entities), increasing HCM complexity, and proven ability to grow per-employee revenue through the addition of related modules, from payroll to timesheets, benefits to onboarding, and more. Our alternative data index for revenue growth is strong (versus consensus). We see sustained 20%+ revenue growth as the company is a proven share-gainer, with an extensive referral network.

View the Interactive Chart

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PTON

MEGATRENDS: Health & Wellness, Connected Fitness

Recent IPO PTON is one of the more “controversial” names in the market: with negative EPS expected over the near-future, all eyes are watching the company’s path to profitability, with focus on sales growth, CAC, LTV, and churn. We saw exceptional traction in search and Twitter throughout the critical holiday season, as the company’s quirky ad dominated the conversation for days. And while some observers thought that a Peloton bike is not an appropriate gift for a spouse, we view the ad as a major marketing coup: PTON thrust itself as a potential holiday gift (with the alternative data to prove it worked). Longer term for PTON, we see a good ROI for consumers ($39/mo beats most gym memberships), as well as increased market size as a handful of competitors attempt to enter the market.

View the Interactive Chart

CHGG

MEGATRENDS: Online Learning, Cloud

The dominant US online learning aid and textbook rental player Chegg (CHGG) has several levers to pull operationally in 2020: better bundling, better password sharing control, international, and execution around the recently acquired IT “boot camp”. With remarkable brand recognition, highly scalable content platform (across a variety of subjects), personalized learning aids (including tutoring), and affordable pricing ($15-$20/mo), the ROI for CHGG customers is undeniable versus tuition/remedial classes/dropping out. Yet the company trades at around 9x EV/Sales for FYE 12/2020, below similar high-growth, high-margin, defensible SaaS stories. We see an opportunity for catchup in 2020 (backed by strong search trends), very similar to what we saw with CROX in 2019. Also notable is the nearly 17% short interest, based on float.

View the Interactive Chart

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BOOT

MEGATRENDS: Omnichannel, Private Label

BOOT is an omnichannel retailer of western wear and workwear, with about 250 locations in the US South and West. We see strong alternative data in our index going into 2020 for both revenue and comparable store sales, combined with a broadening realization in the market about the defensibility of the model, including high-margin private label growth and lower discounting. On the valuation side, in the low 20’s P/E for FYE March 2021, the company trades roughly at par with the much larger “defensible” retailers like Dollar General (DG), and below high-growth names like Five Below (FIVE) and Ollie’s (OLLI). We are also seeing good revenue and EPS revisions momentum, along with 11% short interest.

View the Interactive Chart

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MC:FP (US ADR: LVMUY)

MEGATREND: Luxury

Global luxury leader LVMH Moet Hennessy Louis Vuitton SE (MC:FP), parent of Louis Vuitton, BVLGARI, Dior, Sephora, Moët, Hennessy, and a number of other brands, is the most compelling opportunity that we see in megacap consumer. We are seeing strong alternative data across its major brands, indicating revenue growth coming above expectations for deceleration. But it is not just that: MC:FP also recently announced acquisition of Tiffany’s. A compelling fit for this brand, we expect the benefits of the acquisition to become more apparent in 2020: strong USD and weaker tourist flows had been troubling the iconic US jeweller, creating an opportunity for LVMH to make its move, and to add to its maisons. There could be additional upside from accelerated global growth, and improving stability in several major markets.

View the Interactive Chart

FNKO

MEGATRENDS: Omnichannel, Content

Toy maker Funko (FNKO) has been a very volatile stock since its late 2017 IPO but we see a lot going for it in 2020 against relatively low expectations regarding movie hits (vs. 2019). Looking at 2020, we see strong immediate alternative data trends for revenue growth against expectations, undemanding valuation against the toy comps, growth of both DTC and non-toy own IP (board games), strong revenue and EPS estimate revision trends, and 35% short interest. While the toy business is notoriously hit-driven, FNKO’s broad licensor relationships (650+ active properties from 130+ content providers) and channel diversification could well mean real staying power. And, yes, we did check: the Baby Yoda Funko doll on Amazon is sold out.

View the Interactive Chart

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ROST

MEGATREND: Off-Price Retail

Discount apparel retailer ROST (parent of 1,300+ Ross Stores and DD’s) rounds off our H1 ideas. Our data indicates a strong holiday season revenue growth vs. expectations. From a macro perspective, we are seeing strong wage growth in the core off-price retailer shoppers in the US, so going into 2020, we can see better-than-expected revenue growth and margins due to operating leverage scaling. The company trades at around 24x P/E for FYE Jan 2021, roughly in-line with discount comps TJX and BURL: all three are secular share-takers.

View the Interactive Chart

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DOCU

MEGATREND: Cloud

Similar to our returning pick COUP, DOCU is at the forefront of changing business processes, but in contracts. The ubiquitousness of contracts across every enterprise and every department means a very large TAM, and DOCU has the sales growth and KPIs to prove it. Our alternative data for the upcoming reporting quarter indicates better than expected sales growth. The company trades at around 11x EV/Sales for FYE Jan 2021, with very strong revenue estimates revisions.

View the Interactive Chart

While the use of alternative data by investors has increased, it remains far from a mainstream tool in many firms—mostly due to the challenge of using such large and complex datasets. Each year, millions of dollars are being spent on data science and alternative data projects within fund management teams, but this critical new source of alpha remains in the hands of just a few specialists. You shouldn’t need a degree in data science to leverage the benefits of alternative data.

Sentieo provides access to alternative data to any analyst. Designed to dramatically reduce the time equity analysts spend driving their research workflow, from searching for data to generating insights, Sentieo helps improve investment performance. The addition of alternative data to that workflow increases opportunities for finding alpha far beyond legacy document search or equity data terminal solutions.

Large funds have made multi-million dollar investments in data science teams and big data infrastructures in an attempt to win an alternative data arms race that is predominantly driven on the hope of finding the needle in the haystack, big bet investments. When it comes to the possibilities of alternative data, we’ve really just scratched the surface.

Most alternative datasets come from consumer-generated data. For this reason, and as more consumer behaviors shift to digital, we expect to see alternative datasets becoming more predictive. Given that, building alternative data into the core research workflow will be essential to keep a competitive edge.

CONCLUSION

Looking AheadALTERNATIVE DATA INFLUENCE: JUST GETTING STARTED

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Sentieo is a financial and corporate research platform for executives, investment analysts, and researchers that offers them the insights, speed, and confidence they need to make informed strategic decisions so they can outperform the market and gain a competitive edge. Serving a global customer base, Sentieo is the first platform to support the complete financial and corporate workflow. To learn more about Sentieo, visit sentieo.com.

For feedback, questions, or comments about this paper, contact us at hello@sentieo.com.

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