• The profits and stock prices of US companies have been
    dislocated since the financial crisis, Deutsche Bank analysts
    said in a recent research note. 
  • But this is changing as investors increasingly shun
    companies with weaker returns on equity and  dividend
    payers that are facing more competition from higher bond
  • The analysts published a list of 10 stocks that could
    benefit the most, and 10 that could be hurt the most by this

Investors don’t always reward the most profitable companies by
buying their stocks. 

In fact, since the financial crisis, stock prices have largely
been dislocated from company profits, according to a recent
research note by Deutsche Bank. For example, during the
five-quarter-long profit recession that began in Q2 2015, largely
driven by energy stocks, the S&P 500 gained 1.5%. A broader
decade-by-decade analysis shows the
relationship between profits and returns is inconsistent

“However, their reattachment is finally in full swing,” Luke
Templeman, a Deutsche research analyst, said in the note. “That
gives investors the opportunity to buy stocks that benefit from
the trend and sell those that are hurt. In fact, since the
inflection point in mid-2016, our model shows ‘reattachment’
stocks have returned 55%, double the market’s return.”

The dislocation existed in the first place partly because stock
prices aren’t only influenced by profits. Also, stock prices are
more a reflection of yet-to-be-known future profits than
historical performance — hence, the recurring disconnect. 

The analysts found that after the Great Recession, the dispersion
of returns on equity was much higher than stock-price dispersion.
What that means is that the market prices investors agreed on
were similar for many different stocks, even though their
profitability varied widely.Screen Shot 2018 06 08 at 1.24.24 PMDeutsche Bank

Templeman said that other structural factors contributed to this
disconnect. He pointed out the growth of passive investing, a
rising tide that lifted many boats including some companies that
didn’t “deserve” to rally. 

The “post-crisis obsession with dividends” was another
contributing factor, according to Templeman. In their hunt for
yield, investors turned to stocks with higher payouts as bond
yields fell, and leaned into companies even when the fundamentals
didn’t justify their share prices, Templeman said.  

But with bond yields and interest rates rising, companies that
pay the highest dividends as a share of their earnings are slowly
losing their appeal, he added. 

“The result of the recent short-term structural shifts is that
the dislocation between returns on equity and market returns will
likely continue to converge,” Templeman said.  

Screen Shot 2018 06 08 at 2.33.37 PM

Deutsche Bank

Below is a table showing the stocks the analysts said could
benefit or be hurt by this trend. To create the list of stocks
that could benefit, they filtered by companies that have a
top-quartile return on equity, but have produced
below-top-quartile returns over the past year. Conversely, the
stocks that could be hurt were in the bottom-quartile of returns
on equity, but saw one-year returns above the bottom

Screen Shot 2018 06 08 at 1.49.22 PM

Deutsche Bank

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