Quantitative vs. Qualitative Investing

Quantitative vs. Qualitative Investing

When an investor is deciding whether or not to purchase stock in a company, he or she should perform a qualitative and quantitative analysis.

Qualitative Analysis

A qualitative analysis is basically the non-numbers analysis.  This consists of an evaluation of a company’s brand, mass marketability, competitive advantage, leadership, growth potential, etc.

Qualitative investors care more about the long-term growth potential of a company rather than short-term price fluctuations.  Companies that are currently attractive to qualitative investors, but not to quantitative investors would include Google, Chipotle, Amazon, and Netflix.  When Google, Chipotle, and Amazon had their initial public offerings (IPO’s), quantitative investors claimed that the companies were overvalued.  In contrast, qualitative investors claimed that the future for these companies what limitless.  In a way, both investors were correct.

The qualitative investors were correct because Google, Chipotle, and Amazon ended up being incredibly successful.  An investment in these companies at the time of their IPO’s would now be worth a fortune [this is not true for Google...it's worth 2-3 times its IPO, not "a fortune".  I would say: An large investment in Chipotle and Amazon at the time of their IPO’s would now be worth a fortune, while such an investment in Google would have more than doubled. 

In the quantitative section below, I will explain why the quantitative investors were also correct.

Quantitative

A quantitative analysis is an analysis "by the numbers".  This entails pouring through a company’s financial statements to create a fair trade value.  In other words, quantitative investors look at the current financials of a company to place a price tag on it, and ask if the stock price is significantly above that price tag.  Ratios that quantitative investors put a great emphasis on include the price to earnings ratio, price to book ratio, and PEG ratio (PE ratio divided by the growth rate).

So why wouldn’t a quantitative investor have invested in Google, Chipotle, or Amazon’s IPO?  The answer is that all of these companies appeared grossly overvalued at the time of their IPO.  All of the ratios mentioned above that are important to quantitative investors were astronomically large at the time of their IPO.  For example, when Amazon had its IPO in 1997, the company’s market value was $438 million.  However, the company appeared overvalued because it had not yet even made a profit.  So, if Amazon even earned $1 million, the P/E ratio would have been astronomically high at 438.  Quantitative investors would have a heart attack at the sight of a P/E ratio that high, and probably would have shorted the stock, figuring it was doomed to fail.

The quantitative investor would have been correct in not buying Amazon, because it was not necessarily a good short term investment.  Like many great success stories, there were times when Amazon’s share price was plummeting and short term investors sold their Amazon stock and unfortunately never reaped the subsequent astronomical returns.  Amazon is now worth over $84 billion dollars representing a return on investment of 191,680% from its IPO.  Pretty good!

LinkedIn, Vera Bradley, MAKO Surgical, Green Mountain Coffee Roasters

All of these recommendations are qualitative investments.  It is to be expected that price fluctuations will be great.  We have already seen investments such as MAKO Surgical and Green Mountain increase tremendously in value, however, we have also seen investments like Vera Bradley and LinkedIn decrease in value.  The trick is to "weather the storm" and hold on for the long term if you believe, as I do, that these companies have great products and great leadership that will ultimately dominate their respective markets.  You don’t want to be like the quantitative investor who sold his/her stock in Amazon because the price went down in the short term.  You want to be the qualitative investor who held onto his/her investment and through thick and thin, only to finish financially far, far ahead of the crowd.

Hansen Medical (HNSN) the Next Big Winner?

Dr. Frederic H. Moll


Here are some quick facts about Dr. Moll:

• Co-Founder of Intuitive Surgical (ISRG)
• Director of MAKO Surgical (MAKO)
• Co-Founder of Hansen Medical (HNSN)

For more on Dr. Frederic H. Moll, click here.

Below you can see the share price performance of both ISRG and MAKO (all from Yahoo! Finance).

Above shows you a 1,732% return since 2002

Above shows a 317% return since 2009

Three Apples From the Same Tree:

ISRG, MAKO, and HNSN are all basically the same thing (at least to an investor).  All three companies have patents for robots that perform surgeries with better precision and accuracy than anything else on the market.  Even better, the surgeries performed by the robots are both very common and very expensive!  The quality of the robots, combined with the commonality and price of the surgeries, lead to huge profits, which in turn lead to great profits for investors (just take a look at the charts above!).

Brief Description of Hansen Medical

Hansen Medical, Inc. develops, manufactures, and markets medical robotics designed for accurate positioning, manipulation, and stable control of catheters and catheter-based technologies.

-Fidelity.com

Below is a short video of Hansen Medical.  If you are receiving this via email, please click this link.

Official Recommendation:

As of right now, buying stock in Hansen Medical is too risky.  However, like Zipcar, I will be monitoring Hansen to see if a good investment opportunity arises.  Stay posted!

Buy MAKO and NXTM

Price Drop:

MAKO and NXTM shares plunged today more than 6% and 12%, respectively.  Despite the fact that both companies have been increasing revenue wildly, the market was upset that earnings were not higher.

Long Term vs. Short Term

Short term investors freak out when companies do not meet earnings expectations, long term investors look at the bigger picture.  In the case of MAKO and NXTM, at this early stage of the game, revenue growth is far more important than earnings growth.  As investors, we are most concerned about whether or not MAKO's and NXTM's products are being accepted into the medical community.

If you are new to Caligiuri Investments or need a refresher on MAKO, please click here.

Recommendation of NXTM:

Nxstage Medical has the patent for a home dialysis machine.  Currently, patients must go to the hospital to receive their dialysis treatment, so NXTM provides a much more convenient treatment solution.  In addition, NXTM's dialysis machine has been accepted into the medical community and has experienced tremendous growth in sales.  If NXTM continues to penetrate the dialysis patient market, as I expect it will, investors will rake in the profits.

Buy MAKO Surgical

What is MAKO Surgical?

The MAKO Surgical robotic arm provides an innovative orthopedic knee repair procedure.  The surgery has proved to be wildly successful and is already being adopted at a fast pace.  Anyone who suffers from osteoarthritis of the knee should seriously consider undergoing a MAKO Surgical procedure.

For a more detailed analysis please see the video below.  If you are receiving this recommendation via email, please click this link.

Price Jump

Shares of MAKO Surgical jumped over 10% today on news that 11 more MAKOplasty centers (MAKO Surgical robot centers) will open during 2011.  For more information on the price jump, click this link.

Room to Grow


Patents mean profits baby!  MAKO Surgical has the patent on its robotic arm, so it has the ability to charge high premiums due to a lack of competition.  There are more than 15 million people in the United States alone who suffer from osteoarthritis of the knee.  Right now, MAKO performs knee surgeries on less than 1% of of the applicable population in the U.S.  This represents a very large untapped market-share.

MAKO's robotic arms are being adopted at a very fast pace, and I fully expect this aggressive growth to continue.  Time to get on the bandwagon now before its too late!

Michael R Caligiuri owns shares of MAKO Surgical