1. Trading Strategy Investigation BANKRUPTCY INTERNATIONAL Sumit Laddha John Maniatis Ozlem Tanik Robert Scott Melissa Dowsett

2. BANKRUPTCY INTERNATIONALAgenda  Introduction  Strategy  Methodology  Results  Out of sample testing  Conclusion

3. BANKRUPTCY INTERNATIONAL Topic & Hypothesis  Examine a trading strategy based on using Capital Expenditure in the Utilities Industry  High Capital Expenditure as a % of Total PP&E is a sign of future revenue and earnings increases in an industry with heavy capital expenditure requirements and low R&D like Utilities

4. BANKRUPTCY INTERNATIONAL Strategy & Approach  Future returns of companies with high capital expenditures will be higher than the index due to increased future revenue and earnings generated by the CapEx  Approach is to build portfolios based on CapEx/Total PP&E. Compare high / low portfolio performance to the S&P 500 Utilities Index

5. BANKRUPTCY INTERNATIONALVariables  CapEx/Total PP&E Adjusts for the relative size of the company and shows the relative size of the expenditureAdjusts for the relative size of the company and shows the relative size of the expenditure  Returns If the market responds to CapEx itself then we should see a good correlation with the shortest lag of returnsIf the market responds to CapEx itself then we should see a good correlation with the shortest lag of returns CapEx is reported quarterly after the quarter when the investment is made, so the minimum is a lag 2 returnCapEx is reported quarterly after the quarter when the investment is made, so the minimum is a lag 2 return

6. BANKRUPTCY INTERNATIONALVariables  Returns (continued) If the market responds to the resulting increase in earnings/revenues, there will be a correlation with lag 3 or lag 4 returnsIf the market responds to the resulting increase in earnings/revenues, there will be a correlation with lag 3 or lag 4 returns CapEx may have an impact longer than one quarter, so we also looked at 1 year returnsCapEx may have an impact longer than one quarter, so we also looked at 1 year returns

7. BANKRUPTCY INTERNATIONAL Data Selection  The index selected was the S&P500 Utilities Index Reasonable number of companies (approximately 30-35)Reasonable number of companies (approximately 30-35) Industry where CapEx is a sign of growth in operating capacityIndustry where CapEx is a sign of growth in operating capacity Mature industryMature industry

8. BANKRUPTCY INTERNATIONAL Time Frame  Time frame selected was quarterly samples for In sample 1980-1995In sample 1980-1995 Out of sample 1996-2000Out of sample 1996-2000

9. BANKRUPTCY INTERNATIONAL Data Collection  Required CapEx and PP&E as well as Price information  Issues: Missing all data on 4 companies (Columbia Gas, Ensearch,Missing all data on 4 companies (Columbia Gas, Ensearch, Can’t get future returns on a company that leaves the index because it has been acquired (due to lagging and the use of 1 year returns this impacted on portfolio selection for up to eight quarters before the company actually left the index)Can’t get future returns on a company that leaves the index because it has been acquired (due to lagging and the use of 1 year returns this impacted on portfolio selection for up to eight quarters before the company actually left the index)

10. BANKRUPTCY INTERNATIONAL Evaluation of Variables-1Y

11. BANKRUPTCY INTERNATIONAL Evaluation of Variables-1Q

12. BANKRUPTCY INTERNATIONAL Results-1Q Capex

13. BANKRUPTCY INTERNATIONAL Results-1Y Capex

14. BANKRUPTCY INTERNATIONAL Out of Sample Testing

15. BANKRUPTCY INTERNATIONALConclusion  Our hypothesis is not supported by our analysis  We observe a consistent reverse relationship between Capex and price.

16. BANKRUPTCY INTERNATIONAL Conclusion-Possible reasons  High capex =>decrease in cash flows  Effects of capex on profitability seen in longer time horizons  Capex includes replacement cost (to overcome, compare with depreciation)