As 2019 draws to an end, I hope you’ve been able to achieve all the things you’ve set out to do this year.
Having goals and gradually improving yourself to achieve them is a healthy thing, no matter where you are in life.
For us here at Jitta, 2019 has been a year of great learning and tremendous growth. We’ve been able to help investors in so many more ways, namely:
- We launched a mobile application to provide investors with a convenient and seamless access to Jitta’s fundamental stock analysis on their mobile devices.
- We became the first startup in Thailand to obtain a fund-management license from the country’s SEC, under the name Jitta Wealth Asset Management, to operate a private fund that follows the Jitta Ranking investment strategy for passive investors in Thailand.
- We further fine-tuned our algorithms and backend systems so our AI can analyze stocks better and faster. We also expanded our database to include exchanges in 16 countries and territories around the world.
The algorithm updates will take place at the end of this year, and will make Jitta Score and Jitta Line more robust indicators of business fundamentals and value.
Here are the major changes coming to our algorithms in 2020:
- More emphasis on consistency when analyzing business growth
- Improved calculations for commodity stocks to better identify “a wonderful company at a fair price”
- Adjustments to Jitta Line to represent over- and undervaluation as well as word switches from Above/Below Jitta Line to Over/Under Jitta Line
As a rule of thumb, wonderful companies should be able to expand and increase their business valuations in the long run. That would, in turn, prompt stock prices to go up.
Normally, investors would look at a compounded annual growth rate (CAGR) to determine earnings growth. If Company A’s earnings per share starts at $1 per share then rises to $2.5 per share in the fifth year, the company’s compounded earnings growth is 20% for the past five years.
Meanwhile, say, Company B’s five-year CAGR is 15%. You might think that Company A, at 20% growth, is a better investment.
But that’s not necessarily the case.
CAGR alone cannot tell you whether that growth has been consistent throughout those five years. And that consistency is key for growth sustainability and long-term investment suitability.
Now, let’s dig deeper into Company A’s and B’s earnings:
The year-on-year changes paint a completely different picture, don’t they? Despite having a higher five-year CAGR, Company A experiences wild earnings fluctuations that one cannot confidently, or even remotely, project which direction the earnings are going to go for the next five years.
In that sense, Company B seems to perform better even if its CAGR is lower. You can clearly see its growth trend and that makes it a less risky investment in the long run.
In other words, Company A’s numbers are statistically unreliable—you cannot tell what its earnings per share is going to be two years from now. It can be higher or lower than $2.5. But Company B’s numbers are much more prognosticative; the probability of its EPS exceeding $2 is high.
So we fine-tuned our algorithms to reflect this. Our AI won’t just look at CAGRs; it will look at all facets of growth throughout the last five years (or any number of years required for a particular analysis).
- How many positive-growth years?
- How many negative-growth years?
- For the positive-growth years, how much growth and what is the highest rate of growth?
- For the negative-growth years, how much decline and what is the highest rate of decline?
- How many loss-making years?
We now consider all these factors to make sure that companies with steady growth (all else being equal) will receive higher scores to reflect long-term competitiveness, predictable future and lower investment risks.
Here’s the low-down on Company A and B:
With this information, you can clearly see that Company B is more promising thanks to the steady profit growth. The probability you’ll incur a huge loss is lower with Company B than Company A.
Because—and you’ve heard this many times before—stock prices will eventually head in the direction of business growth.
If you invest in Company A, then comes next year when its profit decreases by 50%, you’ll most likely be losing money.
Because Jitta’s principle is to invest for the long term—we focus on thorough stock analysis and minimal rebalancing—we will choose Company B over Company A for better chances of profitability.
In addition to earnings per share, we also modify the way we analyze other growth-related indicators like revenues, cash flow and dividends along this same principle.
Commodity Stock Analysis
Commodity stocks have highly volatile business cycles. Profitability is directly tied to hard-to-control material costs and selling prices. They also require high capital expenditure to constantly improve production processes and reduce costs.
In a good year, profits may skyrocket a few hundred percent. But in a bad year, profits can tank, or, worse, hit negative numbers due to declining margins.
Consequently, a good telltale sign of a commodity business is a gross profit margin (GPM) that is highly cyclical and volatile compared to other types of business.
So we are factoring GPM volatility into our calculations to ensure that a company with low GPM fluctuations throughout the past 10 years will receive a better score (all else being equal).
For example, let’s look at Company X’s and Y’s GPMs in the past five years:
Based on this information, our algorithms will give Company X a higher score, because the company proves a less risky investment during a downturn.
Sure, the upside gain could be lower as well. But let’s not forget Warren Buffett’s first rule: never lose money. Our priority is to protect you against losses before anything else.
This adjustment not only allows Jitta to screen commodity businesses for quality and better score them, but also to filter out commodity businesses from a pool of wonderful companies.
Because wonderful companies generally maintain a fairly consistent gross profit margin. The number might increase or decrease at certain times, but the fluctuations shouldn’t be as wild as a commodity business.
Other minor improvements
Additionally, there are a few little enhancements made in regards to the calculation of unusual income for analytical precision. We also give three-year profits a little more weight in our calculations.
All these adjustments were made to make Jitta Score more nuanced and a better measurement of long-term business competitiveness while also being indicative of medium-term business trends. This should help investors make more profitable investment decisions and generate higher long-term returns for Jitta Wealth customers.
Jitta Line Updates
We’re happy to announce new adjustments to how we convey the relationship between Jitta Line and stock prices. The changes are twofold:
1. Basing the margin calculation on Jitta Line instead of stock prices
The room between Jitta Line and stock prices represent the margin of safety, and we’ve been basing our calculation on how much one may gain or lose when stock prices move away or closer to Jitta Line. In other words, we’ve been showing an upside gain and a downside risk using the price as the denominator.
But from here on, Jitta Line will be the denominator to show how much more expensive or cheaper than Jitta Line is a stock price.
Example: Stock A’s market price is ฿12 while its Jitta Line is at ฿10
The old Stock Summary would show that the price is 16.67% above Jitta Line as the stock price was the denominator.
(12-10) * 100/12 = 16.67%
From now on, however, it will show that the price is 20% above Jitta Line as Jitta Line is now the denominator.
(12-10) * 100/10 = 20%
This adjustment doesn’t affect the rest of our stock analysis as stock prices and fair values, Jitta Line, remain the same. It’ll just be more intuitive and easier to understand.
2. Changing from Above/Below Jitta Line to Over/Under Jitta Line
“Above Jitta Line” used to describe a situation in which stock prices are higher than Jitta Line, and “Below Jitta Line” used to describe the opposite. But the questions kept pouring in: which is “good”, and which is “bad”?
So we decided to switch from Above and Below to Over and Under, alluding to overvaluation and undervaluation. When stock prices are “Over Jitta Line”, it means stocks are overvalued. When stock prices are “Under Jitta Line”, it means stocks are undervalued.
Hope this helps!
Our team will start implementing all these updates after the market closes on December 31, 2019. All changes will be reflected on Jitta.com by January 1, 2020.
Thank you for your unrelenting support. We wish you good health, happiness and prosperity for years to come.