Using BIG DATA to find little gems (Finance & Social Media)

Thoughts on Markers for Potential Targets. --Ned McDonnell; 6th December 2015

Purpose of the indicators. Until the group was informed at the Tuesday meeting

(December 1st) that XXXX had suspended its initiative with YYYYY, and that its principal – Mr(s) ZZZZZ – already had five targets in mind, this mission was one of finding the five golden fish in the deep blue sea.

Bringing a method to the madness. Straight-away such a task would be

impossible to accomplish in one quick and easy step. So one has to do some things to aid the process:

go to where (s)he will most likely find those five golden fish;

design a net to let most fish through but capture the bigger ones, hoping also to snare the big golden Saturday night fish fry (https://youtu.be/LI0spicgGKU); as well as,

sort through the catch, throwing back those ‘unglittering’ fish and hanging onto the ‘goldie-lox’.

In this case, a decisive majority of the manufacturing activity of electro-widgets seems to be taking place in China as private-labellers, largely for distributors in the wealthy O.E.C.D. countries. In term of YYYYY’s mission, that means finding indicators that signal-&-single out possibilities. In this case, there may be as many as 250-300 electro-widget contract manufacturers in China. One needs indicators sufficiently discriminative to suggest, say, 25 possibilities. (S)He then rifles through them to figure out which of those, if any, are among the golden five.

Contours and Constraints. So far, so simple. Now for the hard part: what are those

indicators? I set about to think through what these markers would be. In doing over a third of the initial research of the 468 companies filtered out of Amazon, I noticed one thing right away. As I rummaged through Wikipedia, Bloomberg, Manta, Facebook and Linked-In and other pages as well as the web-sites of the companies analyzed, there was a paucity of hard data. Most of these Chinese manufacturers do not appear to have financials, at least in any of the six languages I might understand with respect to financial terms. Perhaps their financial numbers are in Chinese. Many of these Chinese companies host stale web-sites with little readily apparent social media activity (at least in English or another principal Western language). I believe that the 168 companies that I reviewed qualify as a representative sample of all 468. So one would need to look beyond the financial ratios or trends upon which most cold-calling investment bankers rely and start looking for behavioral cues from the social media and the web. The targeted companies are to be those seeking to expand overseas by moving up the value chain to more profitable, higher-end and better crafted products, much like the ascension of Japanese electronics manufacturing in the 1950s and automobile fabrication in the 1960s.

https://youtu.be/LI0spicgGKU


Financial Indicators. The financial indicators that seem like possibilities to me,

though rarely attainable, would include those data indicative of production improvements or the manufacture of new products. As with the behavioral cues to follow, the genesis of these proposed markers is my envisioning, with my mind’s eye, what I would do were I the head of a small manufacturer with big ambitions to go up-market and across continents. Accordingly, I submit the following ratios.

1. Ratio of Research and Development expenses (R.&.D.) to sales. The calculations apply both for a specific datum of the most recent reporting period (a year or a quarter) or as a trend of data over time (up to five years or up to twelve quarters). The parameters here include such things as a threshold of R&D expense to sales, with my initial guess at 20%; or such costs trending up by, say, 25% over the last a quarter or by 50% year-over-year. This ratio indicates an increasing resource commitment toward renovation or innovation.

2. Capital Expenditures (CAPEX) to assets. Were this level more than 25% over the past quarter or 50% year-over-year, one might infer that the company is ramping up production capacity, requiring technical support to catalyze concurrent product development and, eventually, additional financing to scale production and sale of the newly developped products. Tracking the trend would also be instrumental in capturing those ratios just below the threshold, were such ‘near-miss’ values sustained over time.

3. Percentage of R.&D. to the sum of CAPEX + R.&D. This ratio casts R.&D.

expenses, at least in this electro-widget space, as operating CAPEX. This ratio, and its trend, indicates that the company is seeking to accelerate new product development and may need additional resources to ramp up production capacity.

4. The trend of the ratio of earnings before interest, depreciation and amortization

(E.B.I.D.A.) to sales. This calculation applies to the previous four years or eight quarters and indicates whether or not the analysand is building a sustainable profit-base on which to upgrade its franchise. Please note that I consider E.B.I.D.A. – that is, E.B.I.T.D.A. net of taxes – to be the appropriate statistic as tax authorities always enjoy the first claim and have the power to enforce it.

5. The trend of E.B.I.D.A. to Cash Flow. This calculation raises the question about

whether the company is cooking its books (a notorious and endemic practice in China). More importantly, this calculation may also indicate whether a company is succeeding but needs cash to continue the momentum.

6. Trend in the amount of equity and indebtedness (capital). This trend shows

whether the company is already financing its expansion by issuing debt or (very unlikely) equity.


Now, I am sure there are other ratios, like trends in finished goods inventory and inventory turnover that will likely better indicate activity indicative of a change in market position or product mix being pursued by the possible (plausible) target. These data and other ratios, folks, represent the easy part….¡BUMMER!

Behavioral cues. Now for the squidgy part. I would defer, obviously, to the insights of

A.I. experts to select the key-words or specific social signals as likely behavioral cues. Nevertheless, I sat down and thought through, again in my mind’s eye, what I would do if I were the head of one of these backwater commodity electro-widget providers, wanting to hit the prime-time but lacking the resources, and the cap-marts entrée, to do so. So, what to do? Well, I would want people to know what I am up to.

The vision thing; or, let’s talk strategy. And, scratching my head, I would

wonder, “Hmm. 60-80% of the manufacturing of these electro-widgets is carried out here in China to feed into a market in which 80-90% of the product consumers do not speak any Chinese. Furthermore, English seems to be the primary or secondary (read: business) language of 60-80% of the world. Shoot, Mister, I had better let people know in English just what my intentions really are and just what I need to realize them…” So what would I do to get the word out and around in English? I would:

create, translate or, in some other way, upgrade / optimize my web-site;

start communicating through social networks the product-improvements or my new products to create anticipatory buzz;

hire some new people;

open up and use Twitter, Linked-In, Quora and GOOGLE+ accounts (plus relevant Chinese channels like TenCent et al. and other non-U.S. based social networks in Europe and elsewhere); as well as,

start blogging, or writing for news outlets, essays explaining my new products and intentions to educate not only prospective buyers but also possible capital providers.

Tactical ideas. Accordingly, I propose the following indicators, at least one of which

YYYY could start to capture immediately in Chinese without the A.I. machine knowing the language. The social networks I suggest are likely not so applicable in China; Chinese trans-web media would be monitored, per the guidance of personnel in China. The cues might include:

1. new accounts opened in Linked-In, Twitter, Facebook, Quora or GOOGLE+ et al. or other international social media in English, Spanish, Portuguese, French,


German, Russian, Italian or Japanese to indicate efforts of placing company in front of new and cross-border audiences;

2. recency of the opening of existing social media accounts to indicate an effort by the analysand to get the word out and extend its radius of communications;

3. number of posts published on Twitter, Linked-In, Facebook, Quora or GOOGLE+

et al. as a specific date-based datum and as a series of data over time to indicate the level and pace of activity;

4. significant recent changes made during a given reporting period to Facebook,

Twitter, Linked-In, GOOGLE+ or Quora et al. profiles to indicate possible repositioning of the company in the market with the following initial parameters:

ten thousand Latin or Cyrillic characters

three thousand Arabic characters

one thousand ideographic characters (for Chinese, Japanese and Korean)

5. number of comments made by users on GOOGLE+, Facebook, Linked-In, Quora or Twitter et al. pages to indicate upswing of social signals and popular review of the company and its changing product mix;

6. total word volume of all posts on Quora, Twitter, Linked-In, Facebook or GOOGLE+ et al. (e.g. more than 2,000 in a given reporting period) to assess, in a broad swipe, the attention shown toward the company;

7. significant changes in web-site rankings (as tabulated by SEMRush or Alexa et

al.), to indicate web-site updating or optimization, or a new web-marketing push, with suggested ratios of web-site rank for the current period, compared to previous period(s) of:

0.8 for those with a previous period ranking in first ten million

0.7 for those with a previous ranking between the first ten and twenty-five million

0.5 for those with a previous period between the first twenty-five and fifty million

0.25 for those with a previously over the first fifty million

8. trend of web-site rankings over time to verify the improvement of the site or the acceleration of marketing versus a one-time up-tick due to a news article or other marginal event as well as to capture those sites with steady and sustained improvement but not quite matching parameters illustrated below:

a site improving its ranking from 60 millionth to 30 millionth in period-1

from 30 to 20 millionth in period-2

from 20 millionth to 15 millionth in period-3

from 15 millionth to 13 millionth in period-4 as well as,


9. press coverage of companies over time (both articles and press releases), especially in the English, Japanese, German press to indicate an effort to gain exposure and possible enjoying a vote of confidence in the case of product reviews.

One subject to look for in the press coverage would be announcements of plant or product mix expansion; high levels of new hires (especially of product development or design professionals); the hiring of a significant new percentage of sweat shop workers; as well as, want ads for product managers designers. Another would be announcements of new distribution contracts inside the wealthy O.E.C.D. markets.

Data & Analytics

Using BIG DATA to find little gems (Finance & Social Media)