PT  - JOURNAL ARTICLE
AU  - James L. Grant
AU  - Chris Rowberry
TI  - In Search of Certain Earnings
AID  - 10.3905/joi.2008.707216
DP  - 2008 May 31
TA  - The Journal of Investing
PG  - 35--46
VI  - 17
IP  - 2
4099  - https://pm-research.com/content/17/2/35.short
4100  - https://pm-research.com/content/17/2/35.full
AB  - Sector composites that have highly stable earnings streams allow the portfolio manager or analyst to derive “earnings certain” sector risk premiums. ACE (approximately certain earnings) sectors represent such baskets. Because sector pricing is influenced by earnings variability, obtaining risk premiums from standard sectors is contaminated. With knowledge of an EPS stability measure, a composite engine, and a robust DCF framework, we can discover companies within each sector that exhibit highly stable earnings. In practice, ACE sectors can be used to derive current/historical “earnings certain” sector risk premiums, enhance sector rotation strategies, obtain sector-implied growth rates, make risk adjustments for present value modeling, and construct improved valuation benchmarks.TOPICS: Security analysis and valuation, factors, risk premia, portfolio construction