{"id":34162,"date":"2023-11-02T18:17:28","date_gmt":"2023-11-02T18:17:28","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=34162"},"modified":"2024-03-21T06:21:16","modified_gmt":"2024-03-21T06:21:16","slug":"bottom-up-strategies","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/bottom-up-strategies\/","title":{"rendered":"Bottom-up strategies"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/HSen3JaHKwE\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>In equity investments, whether a manager follows a fundamental or quantitative approach, they can further be classified as bottom-up or top-down investors. Bottom-up strategists focus on individual company data, while top-down approaches start with macroeconomic factors that could impact multiple companies. Some analysts may blend aspects of both styles.<\/p>\n<ul>\n<li><strong>Relative value:<\/strong> Seeks to buy undervalued companies compared to peers using metrics such as price to book, price to cash flow, and price to earnings.<\/li>\n<li><strong>Contrarian investing:<\/strong> Goes against market sentiment, buying stocks that have dropped and shorting those that have recently risen.<\/li>\n<li><strong>High-quality value:<\/strong> Considers competitive advantages and management quality in addition to valuation, aiming to buy solid companies at a discount.<\/li>\n<li><strong>Income investing:<\/strong> Targets companies with high dividend yields and growth rates.<\/li>\n<li><strong>Deep value investing:<\/strong> Involves distressed companies, buying at a discount to their asset value for potential profit through asset liquidation.<\/li>\n<li><strong>Restructuring and distressed investing:<\/strong> Similar to deep value, but aims to enhance firm value by changing the capital structure.<\/li>\n<li><strong>Special Situations:<\/strong> Focuses on corporate events like mergers temporarily impacting company value.<\/li>\n<\/ul>\n<h3>Value versus Growth-based Approaches <\/h3>\n<ul>\n<li><strong>Consistent long-term growth:<\/strong> Looks for companies with sustained growth over time.<\/li>\n<li><strong>Short-term earnings momentum:<\/strong> Focuses on recent outperformers with expected trend continuation.<\/li>\n<li><strong>GARP (growth at a reasonable price):<\/strong> Uses the PEG ratio (P\/E divided by annual earnings growth) to balance share price and earnings growth for cost-effective growth investment. <\/li>\n<\/ul>\n<p>$$<br \/>\n\\text{PEG Ratio} =\\frac {(P\/E) }{\\text{Annual Earnings Growth.}} $$<\/p>\n<p><em>Where:<\/em><\/p>\n<p>\\(P\/E\\) = Price to earnings ratio.<\/p>\n<p>This approach aims to minimize the price per share relative to the growth rate of the firm&apos;s earnings, thereby purchasing &lsquo;cheaper&rsquo; growth.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>An investor examines recent 52-week moving averages and buys shares of companies that have dropped below their 52-week mark. This investing style is <em>most aligned<\/em> with which of the following?<\/p>\n<ol type=\"A\">\n<li>Short-term earnings momentum.<\/li>\n<li>Special situations.<\/li>\n<li>Contrarian investing.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p><strong>The correct answer is C.<\/strong><\/p>\n<p>Contrarian investing involves going against the prevailing market sentiment. In this case, buying shares of companies that have dropped below their 52-week moving averages means the investor is taking a contrarian approach by buying stocks that others may be selling due to recent poor performance. The investor is essentially betting that the market&apos;s negative sentiment is overdone, and the stock may rebound.<\/p>\n<p><strong>A is incorrect.<\/strong> This option is not aligned with the investor&apos;s approach. Short-term earnings momentum investing typically focuses on buying stocks of companies that have shown recent positive earnings momentum or strong earnings growth. It is a fundamentally driven strategy that emphasizes companies with improving financial performance.<\/p>\n<p><strong>B is incorrect.<\/strong> Special situations investing typically involves investing in companies during unique events, such as mergers, acquisitions, spin-offs, or other corporate actions. It&apos;s not directly related to the investor&apos;s approach of using moving averages to identify undervalued stocks.<\/p>\n<\/blockquote>\n<p>Reading 25: Active Equity Investing: Strategies<\/p>\n<p>Los 25 (b) Analyze bottom-up active strategies, including their rationale and associated processes<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In equity investments, whether a manager follows a fundamental or quantitative approach, they can further be classified as bottom-up or top-down investors. Bottom-up strategists focus on individual company data, while top-down approaches start with macroeconomic factors that could impact multiple&#8230;<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[571],"tags":[],"class_list":["post-34162","post","type-post","status-publish","format-standard","hentry","category-cfa-level-iii","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Bottom-up strategies - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Explore bottom-up active investment strategies, including relative value, contrarian investing, high-quality value, and income investing.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/bottom-up-strategies\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Bottom-up strategies - 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