Earnings Trends with Estimize on Schaeffer's Market Mashup

Discussing a new tracking metric to use in your trading

Managing Editor
Apr 13, 2021 at 10:00 AM
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On the latest episode of the Schaeffer's Market Mashup podcast, entrepreneur extraordinaire, Leigh Drogen, founder and CEO of Estimize Inc, stops by the pod for a wide-ranging chat. Leigh and Patrick chart the origins and inspirations behind Estimize, what so many get wrong about earnings trends (6:30), Bitcoin (11:45), Cathie Wood (17:24), and much more!



Transcript of Schaeffer's Market Mashup Podcast: April 13, 2021

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. Thank you for being patient with me as I battled Cincinnati's highest pollen count in 30 years. But hey, I'm better, I'm here, I'm through it. So, let's get right to it. Please welcome entrepreneur extraordinary Leigh Drogen, Lee, what is happening?

Leigh Drogen: Awesome. Thanks for having me, Patrick.

Patrick: Well, when he's not tweeting about hockey, Lee is the founder and CEO of Estimize, Inc. I see as a fear driven FinTech platform, designed to collect data for earnings analysis and market trends, but I guess we can jump right in, and you can go with how you got started with Estimize. I know you had some Stock twits, experience prior to that, but walk me through your thought process behind Estimize and, you know, I took a look around the site I joined it's very expansive, very community driven. So, just unpack that for me to start.

Leigh Drogen: Yeah. So, my background is originally from, the systematic equity quant trading kind of, you know, piece of the ecosystem. And one of the strategies that, we ran at the first shop that I worked at as an analyst and then a PM was based around the inefficiency of those sell-side analysts’ estimates. Namely, the Thomson Reuters Ibis dataset. And what we were doing was we were basically attempting to better understand what was actually baked into the market, by the time the company reported and then look at what the real surprise was. Instead of, you know, instead of just going off of the sell side number, which we all know is kind of biased and skewed and they sandbag the numbers.

And especially when you get a high growth technology company that reports, you know, they guide, they sandbag the guidance and then the cell site sandbags their estimates with the guidance, and then they beat by, you know, 5% on the revenue. But yet the stock is down well that's because, you know, the buy-side really thought it was going to be 8% on the revenue, or whatever. So, you know, we took advantage of that and made a lot of money off of it. And fast forward a couple of years, I, yeah, I was part of the first team at Stock Twits there in the first two years after Howard founded the company. And what we started to see, even on Stock Twits was the community make estimates on the stream for, you know, what is Apple's iPhone number going to be?

And, you know, what are the earnings going to be? Basically, you know, the story goes that I wanted to build Estimize at Stock Twits. And I asked Howard, several times if I could have, you know, the group of engineers to go do it. And Howard did kind of the best thing I can never ask for anybody to do, you know, that works for you is, he basically, after the third time came to me and said, Leigh, I'm firing you, I'm accelerating your options. Here's some severance and here are a couple of investors that I'm going to introduce you to who are going to invest in your company to build this product, because it's a good idea. It's just not going to happen here. And we went off and, we built it and we launched it in January of 2012 and it worked. And so, it's been a lot of fun since then.

Patrick: Probably the best summers package in the history of FinTech, maybe.

Leigh Drogen: I'm sure there are a couple of really good ones these days in crypto and some other stuff, but some are doing the right thing for your employee perspective, Howard, is quite a mech, yeah.

Patrick: That's great. And you really touched on, I think a problem that's prevalent in the community where I can't tell you how many times, first of all, I'm on the writing side of everything. When I'm instructing and teaching, my employees and they write and say like, I don't understand it was you know, top line beat. Why is the stock down, or why is the stock up after it whiffed on estimates? I think there really is a knowledge gap there that, you guys are doing great work and narrowing.

Leigh Drogen: Yeah. So, the whole point of Estimize was to, from an academic perspective, basically build the collection of these estimates in the way that you would, if you were starting from scratch with a new system. And there are, you know, a set of different wisdom of crowds, principles that you want to build into a system like this. And they're basically; you want a broad, diverse set of contributors. You don't want them to be hearding together. So, you don't want them to see each other's estimates before they make their own. You want them to have the correct incentive to provide aggressive estimates and not just be safe with their estimates. And, you know, we did that from the very beginning. And so, we've been successful at basically we've got 110,000 contributors to the platform now, we cover basically, all the liquidly traded Russell 3000 names.

And, the experiment worked in that, it ended up being both more accurate on a consensus level about 70% of the time relative to the IVUS data. But I think more importantly, and this is really what we were attempting to achieve from the beginning was it ends up that the data set is more representative of the true expectation of the market. When you go to judge it for how does the market actually behave relative to the data? So, we look at a couple of different timeframes as market tests. When we say that, one of them is the kind of the pre-earnings period where you get these trends in the consensus numbers, and how does the stock move relative to those trends? And then, the second one is really the post earnings period. So, the company surprises, well, did it really surprise in whatever direction you think, that we find that there's more alpha in that post earnings period by kind of benchmarking it against the Estimize data than the wall street data.

Patrick: Yeah, that's very well said. So, for our retail trading audience, how does, like, what did you guys learn when reading the tea leaves on these earning trends? And can you walk me through kind of like the guidelines of, that someone should use when trying to read and unpack these earnings trends?

Leigh Drogen: Yeah, absolutely. So, there are two ways to think about, playing around earnings. One of them is kind of a more discretionary, you know, I really like this stock. It's a holding of mine, but I want to understand if I should get heavier or lighter in the name, or I want to understand if it's, you know, a major risk to me. If I have a really high position, really heavy position in either direction going into the announcement. The other way to think about it is from a purely kind of quantitative perspective, which is, is there alpha to be picked up by short-term trading in a lot of different names throughout the quarter to capture some arbitrage. Our business, we have an internal quantitative research team and what we do for our clients, which are mostly large systematic hedge funds and asset management firms is we build those systematic models that kind of do the latter. But on the front end of the platform for all of our contributors and our, you know, kind of subscribers on the front end.

So, you can subscribe to the dataset, to the platform to see all the data without having to contribute as you normally would. We try and give them kind of guidelines, regarding using the data for really discretionary purposes and the way that we view it is this, there's a screener on the platform. And that allows you to basically look at all the different relationships in the data. And so, in the pre-earnings period, what we find is that when there's a really big Delta between the Wall Street consensus and the Estimize consensus, so Estimize is way above the street, kind of in those two weeks before the announcement. We find the stock tends to drift in the direction of that Delta up to the announcement day. So, you want to log the names that have these big, positive deltas between wall street and Estimize, but what's really interesting is that in the through earnings period where you really taking the earnings risk, where there's a lot of vols. We find that the strategy is actually the exact opposite.

So, when Estimize is way above street going into earnings, it's likely that the stock has already surged into the report. And it's harder for the company to hop over that kind of expectations threshold. And thus, we find that between T minus one day before the announcement and T plus 20, there's negative residual return in that period. So those are your names where there are disappointments, the stock will underperform. And if you're really heavy in those names, you may want to lighten up if the stock is surge and the Estimize consensus is way above the Wall Street numbers. And then in the post earnings period, if you're thinking about getting into a position, let's say after the company reports. Let's say the morning after what we find is that if it surprised significantly that there is positive drift in the three days after the report.

And so, you want to get into that stock right away at the open, because there's alpha to be captured there or you want to get heavier in your position. If the stock surprised negatively, like really, really negatively, there's a lot of negative drift in that first day, but what's really interesting is that let's say, it's a deep value name and you've been wanting to get into the position for a while. And let's say the company has a big disappointment and you really want to get in. You don't want to get in right at the open there, you want to wait one day and then enter the trade. Because what we find is that after that first day, for those names, that really disappointed heavily that there's this big positive drift over the next 20, because what happens is institutional traders come in, they scoop those names up kind of baby out with the bath water kinds of things. And there are a lot of alphas there over the next 20 days. So, the platform using the screener can kind of allow you to find these situations, match them up to your watch list, or, you know your portfolio and alert you when there's a potential to make those trades.

Patrick: Yeah, it seems so simple when you think about it like that, as far as identifying the entry points and figuring out when something's already baked in, it feels like something that should have been a foundational piece to an investing strategy, you know, 30 years ago and it's only just now becoming prevalent.

Leigh Drogen: From a discretionary perspective yeah. Now, from a quantitative perspective, it's been about, yeah, about 30 years since they've been doing kind of this type of stuff from a systematic perspective.

Patrick: That's fascinating. I want to pivot a little bit just to some broader topics. I know we exchanged some emails about, you know, the crypto space and it's, I've had conversations with people on these podcasts before, and I always want to come at it from a slightly fresher angle because you see all these news cycles and it's all the recycled content. What is something out there that's being overlooked? Whether it be an angle, a worry or a trend. You just tweeted a couple of things about it earlier about the bank. You can just start from there and we can....

Leigh Drogen: Yeah. So, the Coin base is going to come public here this week. It's going to be a seminal moment for the space, but what I'm really interested in are basically, two things that are going on associated with Coin base, but not for the sake of trading Coin base. You know, we're at the very beginning kind of, of the crypto space. If you think about the fact that Coin base is basically a bucket shop. And I say that, without malice, right? Like I don't say it in a pejorative sense, but like technically Coin base is a bucket shop and, thus it can charge really high fees. And so, you know, they're taking an average of 50 bibs in, fees off of every trade. And that's incredibly high when you think about modern brokerage for assets, right? Like maybe if you're talking about like, institutional bond sales or something like that, but, you know, still it's, it's egregious and it's going to come down.

And so, I think when you look at Coin base’s valuation something around a hundred billion dollars, you know, relative to Binance. And more importantly, I think, relative to what we call these Dexis, the distributed exchanges like Uniswap. I think those distributed exchanges are likely very undervalued relative to Coin base and today, you know, Uniswap some 24% and I think you're going to see this major run in these distributed exchanges as people realize that they're knocking at the door of Coin base in terms of the fees. And you basically can invest in the whole value of those through their coins. So, I think that's a really interesting place, you know, to be putting money right now. I think there's also for me, a lot of interest in the Defi space at large, because you know, the crypto space and it's again very, very, very early, but we've basically just written a new banking system from scratch.

And, if you kind of think about what's going on from a fundamental perspective, you can now be the bank, right by lending money in the form of crypto by staking it, you know, so that people can take out loans and we don't need a middleman. And you're the one that can get that yield now and all of these kinds of Defi protocols give you the ability to invest in, people becoming banks. And I think that's a really interesting concept long-term, what I want to, if I didn't know anything about it, and I'm still new, you know, for a lot of this really, really difficult to figure out which project and which one's going to be, which. There's something called the Defi pulse index, and you can actually just buy one coin that represents the index itself. And I've done that in my personal account, and I think that's a good decision probably for people who don't want to do all the research for each individual kind of protocol. And I'm definitely in that boat too because I don't know, you're in finance from maker, from, you know, any of these things. They're, very complicated, but that's a good solution.

Patrick: And I feel like it's just like one goes down or something like that three more pop up, they're growing like weeds. And I think the rate at which you can try to retain that information. You can't keep up unless next thing you know, you find yourself down the rabbit hole. So I think something simple, like what you just mentioned, it is a start at least, but you are onto something that is the self-ownership of everything about it does have saying power, I think. So yeah, I'm inclined to agree with you. It's just daunting to kind of look at something like that, that we won't really understand, but we understand the concepts behind it and the context behind it.

Leigh Drogen: Yeah, look it's, this is, literally, if you had to open up a bank and understand all the guts of a bank and how a bank works, like that's what they've done here. Except they did it intentionally with crypto because getting the nerds involved in wanting to play around with the guts of a new banking system is the boot program for everybody else wanting to be involved in it. And eventually, somebody will make the user experience of all these things really, really simple, and we'll all get involved. And that's kind of in a way that is the Busch thesis on this set. It's so early that if eventually they do that, the growth in this is going to be massive. And yeah, I don't want to play early-stage VC with each of these individual projects, right. I just want to own a kind of market cap weighted index of the top 15 or so, so that I don't have to know anything about it. I just want to invest in the trend.

Patrick: Exactly, that's, I came to that conclusion myself, I'd say two or three months ago, and I think that's what most people want is they don't want to crack the code, solve the puzzle. They just want a piece of the action. So that's interesting. And then speaking of, you know, piece of the action, I know we also talked about the arc innovation, and I think that's something really that I don't think a lot of retailers, retail traders are quite familiar. So do you want to give like a little broad introduction and what you're seeing, and I'll try to fill in as I'm getting up to speed as well.

Leigh Drogen: Yeah. Look, Cathy would, and the arc stuff touches just so many different major arguments and discussions and trends that are taking place today. So, you know, just some of them are why has growth outperformed value? Why have we seen historically high multiples and high growth tech stocks relative to almost any time in history except for the tech bubble?

Patrick: Ridiculous.

Leigh Drogen: Do those multiples deserve to be higher because there's more innovation taking place today than at any point in history that disruption is happening faster? So should there be a disruption multiple that's more significant. There, is just massive change taking place in regard to the way that ETFs capture assets, right? And what happens when an ETF that inherently is investing in a limited pool of kind of assets, because she's got a very specific type of investing strategy.

What happens when they own 25% of the market cap of a $2 billion stock, right? Like, is there enough liquidity to get in and out, is, are the flows into the ETF actually driving the performance of the stock price? And is that a problem if people choose to take money out of the ETF? There's just so many different, interesting things going on here with Arc and my own personal take on it is that I think Cathy, what is correct in the sense that. We are in a super cycle for technology eating; basically every industry and you want to be invested in low asset, high innovation companies. Because you know, you don't want to have a heavy asset balance sheet. We've seen that the valuation on intangible assets has grown considerably relative to kind of hard assets; some of the quants have been having serious problems with this because a lot of their models were based on the valuation of non-intentional assets.

And so, but I don't think that trend is going away at all, you know, we saw, we've seen software eat the world as Marc Andreessen kind of predicted a decade ago, but I think that it's now eating a lot of other things, that he didn't even predict. And she's on top of this trend, the problem I have with it and why I'm not invested in the Arc TDF, you know, as kind of the proxy for my own equity trading strategy, which is almost purely momentum; I'm a momentum trader at heart. And so, it fits directly into, you know, her philosophy. But my problem is that she's invested in some companies very heavily like Tesla here, where I just find it a little bit hard to believe there's that meat on the bones going forward, right?

Patrick: No momentum there.

Leigh Drogen: My whole, philosophy is you want the middle of the trend. You don't want to be early, and you definitely don't want to hang around late, right? But that middle 80% of the trend just has a ton of returns. And I think some of the names that she's really heavy in here, she's just kind of pushing assets into these stocks because she needs to push assets somewhere and it's hard.

Patrick: Yes, I wholeheartedly agree with that. We wrote something, I think it was yesterday, maybe over the weekend where we talked about kind of wildcard factors for certain areas and our wildcard factor for, Arc, I think was one sentence. And it was just every day is a wild card day for Kathy and her ETFs. That's if you want to strap on and enjoy the ride, be my guest, but it's, there's a lot of choppy waters to navigate there I feel like.

Leigh Drogen: My other like general issue with her whole business is, basically that from an asset manager perspective, I understand that she wants to be fully invested at all times, right? And, in interviews, she has said that basically the way that they kind of pull back from the market after huge runs, where they feel that things are overvalued is not to go to cash. It's to basically try and lower the beta of their portfolio by rotating into what she feels are lower beta names. But the problem is that she's basically rotating into names going from a beta of like two and a half to going to a beta of like one and a half, right?

Patrick: That's not enough.

Leigh Drogen: Just go to cash, you know, like, can we just go to cashier, please? You're up 300%, just go to cash. And so like, I feel that when you can use some basic momentum overlays to, you know, kind of get you out when that draw down starts, instead of having a dry down of like 35 or 40%, you know, which is kind of what her strategy entails. And she's willing to stomach that, you can kind of play some of those names yourself and use a little bit tighter risk management strategy to maybe keep that dry down to like twenty percent so that you don't want to throw up all over yourself.

Patrick: Actually, that makes me feel a lot better about myself, because I've been saying go to cash for, a while now. So, I, so, you know, we kind of mentioned a couple, well, one, your guts analogy was on Twitter. I giggled at that as I was doing my research here and this relates a little bit to your Stock Twits experience as well. You have a very engaging Twitter profile presence, not meant to like gash you up or anything. I just, you're all over the place there and I really have found the connection between social media and investing. I'm all over Stock Twits, I took over Shaffer's Twitter around a year ago and trying to pump those numbers up. What do you see? Where do you see as that trending towards between the relationship in social media and investing?

Leigh Drogen: So, you know, I look at it from my own perspective first and then, you know, trying to extrapolate off of that. And, you know, I got onto Twitter back in 2009. And you know, the reason I got involved because I saw it as kind of a trading journal, I think the traders do really well when they feel like they are financially responsible to somebody else. But responsible to themselves in a public way and you know, none of us are getting abed because we're not trading enough size to get our ideas abed, right? But putting stuff out there being intellectually honest, being intellectually honest with yourself, having to almost explain your own ideas to yourself, I think is a great, I think it's a great thing to do. And Stock Twits, you know, the reason I got involved in Stock Twits at a very early time was because I felt that that was a community that was focused specifically on that.

But there's one really interesting story. I remember very early on at Stock twits, I was on the phone with a prominent member of, not a prominent member of the community, but a very public figure who was coming onto the community. And I was looking at his stream and I was looking at it and I was like; this guy doesn't know what he's doing on here. Like, you know, like you should be doing this not the other thing, and I was on the phone with him, and I was saying these things to him in a very nice way. But Howard, Howard overheard me, and I remember Howard literally while I was on the phone, screaming at me saying, no! never tell somebody else how to use Stock Twits or Twitter. That's not your place to do that we want people to figure out what's good for themselves.

What makes sense for themselves, what's valuable to themselves. And what you think is valuable may not be what's valuable to that person. And he was a hundred percent correct and I learned my lesson like right there that day. And so, you know, I have friends and colleagues who use Twitter and Stock Twits in very different ways from what I do. And even my own kind of use of it has changed over time, significantly from just posting that, to being more of all of who I am and the hockey stuff and politics stuff and geopolitics stuff and the, you know economic stuff on top of the trading. And then it was obviously very helpful for building Estimize at large that the community there, you know, so everybody has their own perspective on it, and you just have to know what you want to get out of it. And that may change over time, in terms of kind of where this whole social thing is going. The last, you know, three or four months has been really interesting because kind of everything that we had been working on for the last 10 years at Stock Twits, and Estimize kind of happened all at once.

Patrick: Yeah, it's all becoming accelerated.

Leigh Drogen: Yeah, with the game stop stuff. And then all, you know, it was like overnight success right of the concept.

Patrick: Yeah, that's February month was. I mean, it was I, not that I have this long-decorated experience, but I've never seen anything like that in watching it happen, so yeah.

Leigh Drogen: It looks so, you know, I think the retail trader kind of mania that's gone on is transitory in nature, right? Like there's no way everybody could keep this up. I was getting calls; I was getting calls from my microbiologist friend in St. Thomas down in the Virgin Islands saying, how do I open up an account so I could trade penny stocks, right. Like, that's just, you're at a point there where it's not healthy.

Patrick: I mean, I had some of my dumbest friends giving me advice and I'm just sitting there like, can we just, I don't want to do that. So yeah, and that's what I always find fascinating about the dichotomy between social media and investing is yes, it's out there, it's in short, compact bite size form, but is it reputable, you know, are you getting actionable advice behind it? And I love what you said about kind of adjusting, because I actually talked to somebody higher up in the Twitter sphere, I guess I'd call it. And they gave me this kind of laundry list of this, that, and this, that he saw wrong with our profile. And I sat down and looked at it and said like, look dude, that's not what we're looking for. That's not the audience that I'm trying to build, and it really does depend on the user and what they want to achieve. So, I'm glad that someone else out there understands that and gets that, so thank you.

Leigh Drogen: Yeah. There's look, you know, on the other side of that there is a lot of useful information. I feel like, you know, Estimize is built as a structured platform so that you can understand just the data without all the other mishigas. But you know, Stock Twits and Reddit and Twitter and all these other platforms, I think personally for me, and I say that because, you know, the lesson from Howard for me. The lesson is that you build a curated list of people that you trust to follow, that share a similar investing philosophy as you. And then you listen to their ideas and use them as a sounding board, and I think it's been incredibly valuable for me. You know, some of the people that I follow, you know, some of them do work at hedge funds and some of them just run really big personal books and it's incredibly valuable to follow their ideas and bounce ideas off of them. And then in general, even the kind of more macro data coming out of the Reddit sphere and kind of the aggregated sentiment, I think if used correctly can be very valuable to understand potentially, you know, where trends and companies are going. And what's the hot new retail name and where the money that's going to pile into the next tech company is going to be, and if you're a momentum trader like me, you know that's very valuable if used correctly.

Patrick: Yeah, I think there are just so many breadcrumbs on there that you'd be insane not to check that out every day, not every day, but as often as possible to kind of stay involved. Alright, well you know, we're about running out of time here. I always like to end with a chance for you guys to promo plug, whatever you guys want. So, I'll give you the floor. What do you guys got going on at Estimize?

Leigh Drogen: Yeah. Look, we'd love everybody and anybody to be a part of the community to contribute their own estimates for coming around into earning season. So, it's completely free to get involved with, if you would like to access the data without contributing can become a client of ours pretty easily. We've got the factor models that represent those strategies that I talked about, which you could access. And, yeah, as I said, the community, the data set only gets better as the community continues to grow. So, no matter what your level of sophistication is, we've got algorithms that either overweight you or underweight you at the consensus. And that is the whole philosophy is, you know, it's all just based on the data, not, you know, not trying to say that the guy at Goldman Sachs is the best analyst, just because he works at Goldman Sachs.

Patrick: Very well said, guys they even have leagues, like the league stuff I thought, you know, for a competitive SOB like me, I would be all over that fascinating stuff, I love it.

Leigh Drogen: Thanks for having me, Patrick.

Patrick: I appreciate it. Take care Leigh.


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