What are we looking for?
A way to see if news flow helps pick stocks that will rise.
Review of last month's recommendations
Yin Luo, quantitative strategist at Macquarie Securities, recommends a portfolio strategy each month for this column. For July, he ranked Canadian materials stocks using valuation, analyst sentiment and liquidity. The 10 top-ranked stocks returned 13.9 per cent, while the bottom 10 lost 2.1 per cent. Therefore, his strategy generated a spread of 11.8 per cent in the month. Since he started to contribute to the column, his strategy has outperformed the benchmark in 20 out of 26 months.
Theme for August
Several research papers that Mr. Luo has been reading recently have argued that quantified news sentiment can be used as an investment strategy. News sentiment can help identify winning and losing stocks and isn't highly correlated with the traditional quantitative factors, he said. "Therefore, it provides diversification benefits."
As Mr. Luo explains, there are natural language processing ("NLP") algorithms that can be used to translate human language into numerical scores. A news story can therefore be converted into a positive or negative score for the companies mentioned in the news, he said.
For this month's picks, Mr. Luo used a service called RavenPack to provide quantified news scores. RavenPack constantly scans hundreds of sources - from traditional newswires such as Dow Jones, Bloomberg, Reuters, to Internet websites and blogs - and translates news into positive/negative scores for thousands of stocks around the globe. Mr. Luo then provides a list of Canadian stocks with the most positive news sentiment together with high rankings in his quantitative model called EMC2.