Investors can use all the data they can get their hands on. Analyzing a company is a tough task, and to find an edge, you must search for hidden indicators that can offer context to financial data. In this regard, alternative datasets are making a mark on investor portfolios and helping them deploy capital in better ways.
On the surface, alternative data might seem like a viable option only for institutional investors. However, when combined with other elements of rich investor intelligence reports, even casual investors can uncover insights into companies that investors from bigger financial funds are less interested in.
Here are a few key ways to use alternative datasets to power your opportunity analysis process.
Investigate New Trends
Catching a company at the start of a new trend is a great way to realize massive portfolio growth. However, spotting trends is tough. Many trends seemingly burst onto the scene with little warning, leaving little time for small investors to capitalize on them.
However, with access to the right data signals, it’s possible to identify trends before it’s too late. Zoom is often cited as an example of a product that took the market by storm (and surprise) following the onset of the COVID-19 pandemic. However, web traffic data indicated that Zoom was consistently outperforming its competition even before the pandemic.
While the pandemic pushed Zoom’s growth to unprecedented heights, the ingredients for an exponential rise were already present. Alternative data intelligence can alert you to budding trends that web consumers are looking at. For instance, are they searching for a cluster of keywords and products that only a few companies offer? Conversely, are they highlighting increasing issues with a company’s product that can make it a potential short in your portfolio?
Most investors look at financial data to discover such opportunities. However, those datasets are often extremely outdated. What’s more, quarterly earnings are not independently audited and are thus less reliable. What’s more, earnings represent only one aspect of a company’s business success and often don’t correlate to changes in stock value.
In contrast, alternative data offers you a real-time view of a company’s health.
Technological progress has meant that many small investors are quantitatively-driven. Put simply, quant modeling is more accessible these days. However, feeding these models with the right data is challenging. Feed them conventional data, and you’ll receive average results. If average ROI is what you’re after, you’re better off sticking to plain-vanilla ETFs instead of spending resources developing a model.
Data quality and context are the keys, and alternative datasets can offer you an edge. For instance, what if you could feed GPS data derived from mobile phone signals to decipher footfall to a retailer’s location? You could extend these datasets to analyze consumer demand at all of their locations.
Web scraping can also be a great way for quantitative investors to keep tabs on their portfolio companies and prospects. For instance, is social media sentiment trending against your company? Have users consistently adopted negative tones, and the company’s marketing has failed to address their concerns?
You can feed these seemingly unstructured datasets into your models to uncover hidden insights. Alternative data like this is best used to complement traditional analysis. For instance, if the company’s 10-K mentions increased customer demand for a certain product or service, you can correlate these claims with alternative datasets.
You can also track trends in the statements within the MD&A sections of annual reports using analytics. How well does management understand their business, and are they presenting an accurate picture to investors? Alternative data sheds a lot of light in this regard, and with a creative approach, any investor can leverage it.
Research Market Impact
Traditional financial data offers deep insights into how well a company is managed. However, in modern business landscapes, it tends to lag significantly. By the time you’ve analyzed the data, the company is dealing with a new trend that renders previous conclusions obsolete.
Web traffic data and related alternate sources of digital performance can shed a light on the market impact a company is having. For instance, you can discover the brand impact of a company on its market compared to its competitors.
Answers to questions such as What does traffic engagement on the company’s website look like? and What is the company’s social share of voice? offer important clues as to its investment potential.
Companies these days face threats from any number of sources. Changes in the sector’s economics and the rise of new competitors threaten a company’s profitability. Digital performance data can reveal troublesome trends well before the financial statements catch up. For example, are consumers complaining about excessive prices on social media?
Are terms such as “expensive,” “poor quality,” or “low value for money” dominating conversations surrounding the company’s product? These can be useful indicators that a company is going downhill, and management must take immediate action.
Alternative data thus provides context to management’s decisions in the short term. It also reveals trends that are likely to leave an impact in the long term.
Better Insights
Alternative data is largely unstructured. However, by augmenting traditional datasets with it, you can develop intelligent company analysis models. The more data you have as an investor, the better your analysis will be. After all, you never know where an edge might exist.
Alternative data helps you uncover hidden catalysts that can cause your portfolio returns to increase exponentially.
