A possible explanation for the outliers described in the video about financeops HOT 1 CLOSED

Thanks for your input. However, I think you have misunderstood the scatter-plots for the S&P 500. As I said in the video, each dot in a scatter-plot represents the return for the WHOLE S&P 500 over a PERIOD IN TIME - the dots are NOT for different companies, they are for different PERIODS! :-) We are interested in forecasting the future return on the S&P 500 from its P/Sales or P/Book ratio.

You also said:

Software companies have very little capital intensive assets compared to heavy manufacturing and energy industries. It makes sense that they have a high revenue while maintaining a low P/B ratio.

Actually it is the opposite: High-tech companies typically have very high P/Book ratios because their profits are high but their assets and equity (aka. book-value) are low.

Example: Apple's market-cap is about USD 935 billion, their 2017 sales were USD 229b, net income USD 48b (21% net profit margin), total assets USD 375b, equity USD 134b. This gives P/Sales = 935 / 229 = 4.1 and P/Book = 935 / 134 = 7. Data from: https://finance.yahoo.com/quote/AAPL/balance-sheet?p=AAPL

At the end of fiscal year 2017 Apple had Cash & Equivalents of USD 20b, short-term investments of USD 54b, but also Long-Term Investments of USD 195b - which I suspects are also primarily invested in financial securities such as bonds. But I would have to look in their actual financial reports to understand exactly what those are.

Nevertheless, Apple has excess cash of somewhere between roughly USD 74b and 270b. If a significant part of those were to be paid out as dividends or used as a share buyback then the assets and equity would both decrease accordingly. That would significantly raise the P/Book ratio.

There is a lot of research that could be done in this area and I encourage you to continue. Unfortunately I cannot help you with more data as I am also having big trouble getting data myself. Maybe you can use Quantopian to get data? I haven't tried it myself.

from financeops.