Hilal El Marraki - Guest Blogger
| July 17, 2017
How to Use Sentiment Analysis for Security Selection
RavenPack dashboards allow investors to analyze different securities using sentiment scores on fundamentals such as revenues, mergers & acquisitions, analyst ratings, product and services, target valuation, balance sheet statements and many other factors. Investors are able to meld all these elements and their corresponding cumulative score to decide which stocks to invest in and which ones to avoid, while capturing underlying risks and managing them more effectively.
In this blog post and its corresponding case study, we examine the use of sentiment analysis to determine which securities to invest in and which to avoid. The report will be a comparative equity research analysis of two legendary American stocks: Alphabet (GOOG) and Amazon (AMZN).
Both these stocks have been dominating headlines recently. They are both known for introducing disruptive technologies or product offerings while exploring untapped markets and business opportunities. Amazon’s stock continues to be a major investor magnet, and the company’s recent news with regard to its intention to acquire Whole Foods has greatly sparked investors’ interest. Alphabet is another “hot” stock at the present time due to its breakthrough innovations in Artificial Intelligence (AI) and autonomous driving. The company has had the highest numbers of AI acquisitions among its peers. Both of these stocks, and their surrounding media buzz, are worth examining in detail.
As previously stated, there are several, already constructed, global equity-dedicated dashboards on www.RavenPack.com. The “US Top 500 Stocks” dashboard, which encompasses the overall sentiment gauge on the top 500 stocks in the United States, was selected as the cornerstone for our analysis.
The “US Top 500 Stocks” dashboard includes a treemap that visualizes the sentiment of each company’s related factors retrieved from thousands of news events and stories during the antecedent month or week. The following treemap (Figure 1) summarizes the monthly sentiment profile of key stocks driving the overall outlook of the top 500 stocks in the US, for the period of June 1st to July 1st, 2017.
The dominating light green color of the sentiment treemap conveys that the overall sentiment is slightly positive with a score of +0.10 and a low media buzz of +2.23 (see Figure 2).
At first sight, we observe the primacy of several preeminent tech stocks in the sentiment treemap, with corresponding large light to dark green boxes (positive sentiment). Apple has noticeably dominated the news during that studied period, with 12,036 relevant stories, leading to a positive sentiment score of +0.23. Other tech stocks such as Amazon (with a+0.43 sentiment score calculated based on 8,453 articles) and Alphabet (with a slightly positive sentiment of +0.02 estimated based on 6,584 articles) have significantly and positively contributed to the overall sentiment score of the US top 500 stocks short-term outlook.
Both companies have dominated news headlines recently for their disruptive breakthrough offerings, innovations, and introductions into new sectors, which make them very appealing to investors looking for financially healthy companies with tremendous growth prospects. Although both operate in the tech industry, each firm has pursued a different path to success. For investors who are considering both stocks but are unsure which one holds a greater potential for growth, assessing the sentiment gauge for internal and external factors linked to these companies, such as competitive advantages, financial position and performance, valuation, and M&A activity, is an important start.
Amazon was established as a modest online bookseller, but has been transformed into a massive online retailer of a consortium of consumer goods. In 2016, Amazon earned $136 billion in revenue. The company’s recent bid to acquire Whole Foods has shaken retailers and grocers nationwide, and is expected to disrupt customer’s grocery shopping experience. Other factors that make Amazon a solid investment opportunity is its unrivaled product and services offering, its notable and strategic acquisitions plan, and the solid sentiment surrounding its stock price growth prospects. Figure 3 below shows a treemap of market-moving events and sentiment affecting Amazon from June 1st to July 1st 2017.
The corresponding case study further explores other investment merits of the company and estimated sentiment across a variety of factors.
Alphabet is recognized largely for its omnipresent Google search engine, which plays a crucial role in our life. During the most recent quarter, the company’s revenues increased by over 22% compared to the prior quarter, which is reflected in a slightly positive sentiment score of +0.17, according to RavenPack. Figure 4 below shows a treemap of market-moving events and sentiment affecting Alphabet from June 1st to July 1st 2017.
When it comes to products and services, Alphabet’s Google unit is the ruler of online search and is viewed as the highest-ranked website globally. Moreover, its YouTube business is the second most visited site. Alphabet has many other developing enterprises including Waymo, its self-driving car unit. Analysts have high hopes for this unit, which is expected to be worth tens of billions of dollars. Google Lens might also hold bright prospects for the company if it is successfully launched and implemented.
Alphabet has been gaining investors’ interest due to its heavy spending on artificial intelligence (AI) and autonomous driving, though those have yet to become substantial revenue drivers. The company has been integrating AI into their products and services, which could positively affect the improvement of products and apps like Assistant and Maps, while producing more relevant results in its core search.
However, Alphabet has been suffering from some prominent legal battles, especially in the European Union. We can observe a huge red box entitled “Legal”, with an estimated negative sentiment score of -0.58; thus, adversely impacting the overall investors’ sentiment about Alphabet stock.
RavenPack’s overall calculation of sentiment score for the US top 500 stocks is slightly positive. The set is driven by giant tech stocks, such as Apple, Amazon, Alphabet and others. The use of sentiment analysis and treemaps should help investors in analyzing stocks when considering including any specific securities to their portfolio. The case study includes a comparative analysis of two noteworthy tech stocks, namely Alphabet and Amazon, with an incorporated sentiment guidance at the end of the report.
Hilal El Marraki is an investment analyst and writer specializing in investment banking, financial markets and M&A transactions.
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