LO 1.4.7.C

Learning Objective: Illustrate how alternative data can help produce alpha when trading stocks.

Review:

• Trading stocks.

• Investors trading commodities traditionally rely on financial reports to obtain information about a company's ability to manage short-term liabilities and avoid cash flow problems.
• However, there are alternative sources of information. For instance, business service and commercial data provider collects detailed transaction data from thousands of American companies in the U.S. They maintain the largest database of commercial activity, focusing on intercompany payment patterns, specifically, payment amounts, timing, delays, and delinquencies.

• Using this data, investors can learn if a company is paying all its debts on time and how its payment patterns are evolving. Consistent late payments can be evidence of the strength and the ability to squeeze suppliers.
• But sudden increases in late payments may be evidence of weakness, namely cash-flow problems. This data can be used to gauge debtor distress - a leading indicator of stock underperformance that can help inform a simple trading strategy.

• Investors can generate alpha by taking a position in a certain company’s stocks ahead of consensus estimates.