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New Financial Index Captures Performance of Arizona’s Publicly Traded Companies
By: Lora Mwaniki-Lyman and Daniel Joseph Kinnear
December 1, 2010
The stock performance of Arizona’s publicly traded companies represented in the L&D Arizona Composite Index, have tracked the DJIA Index and S&P500 Index since the beginning of the great recession (Graph 1).
The L&D Arizona Composite Index is a price-weighted, all market capitalization index made up of companies headquartered in Arizona and publicly traded on the NYSE and NASDAQ. The index, like any price-weighted index (such as DJIA), gives an overview of the direction stock prices of companies in Arizona are moving by focusing on stock value. By doing so, it provides a proxy of investor sentiments and their expectations and perceptions of the performance of Arizona-based Companies. The index is also not a performance-based index since it does not include company dividend payouts and options, and therefore should not be used as an investment tool.
As a regional market index, the L&D Arizona Composite index provides a snap shot of Arizona’s economic health or performance overall. However, it is not a measure of the local business conditions since Arizona is home to companies that operate on a national and global scale.
Eligible Companies
A company must meet three requirements to be included in the L&D Arizona Composite Index:
1) Be headquartered and have principal executive presence in the state of Arizona. It does not necessarily have to be incorporated in Arizona. The index therefore excludes American Depository Receipts (ADRs) which are foreign owned entities trading in the NYSE. Publicly traded companies with a major Arizona presence but not headquartered in Arizona, such as Raytheon, are not included.
2) Be regulated by the Securities Exchange Commission (SEC) and file periodic reports as required such the quarterly earnings reports among others. Consequently, it excludes companies traded on the Over-the-Counter (OTC) markets that are generally not under SEC oversight.
| Graph 1: L&D Arizona Financial Index |
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| Graph 2: Breakdown by Market Capitalization (11/3/10) |
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| Table 1: Top 10 Companies in Index by Market Capitalization (11/3/10) |
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| Table 2: Index Market Capitalization (11/3/10) |
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| Table 3: Company Breakdown by NAICS Industry |
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| Graph 3: L&D Arizona 13 Sub-Index versus DJIA Index |
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| Graph 4: L&D Arizona 13 Sub-Index versus S&P Index |
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| Graph 5: L&D Arizona Composite Index and Sub-Indices |
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| Graph 6: L&D Arizona Sub-Index versus NASDAQ Composite Index |
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| Table 4: Compound Annual Growth Rate Comparison |
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Source: Yahoo Finance and EBR
3) Have presence in the two most liquid exchanges, the NYSE and NASDAQ which present real time market value of stocks; over-the-counter markets are not as liquid. In addition, small cap and micro companies traded in the American Exchange (AMEX) are also excluded. Thirty-nine Arizona-based companies meet these criteria.
About the L&D Arizona Composite Index
The index is broken into two exchange-specific, sub-indices: the L&D Arizona Tech sub-index, which includes twenty-six companies, listed on the NASDAQ; and the L&D Arizona 13 sub-index, which includes the thirteen Arizona companies listed on the NYSE.
Of the thirty-nine companies in the index, more than three-quarters of the companies are small cap with a market capitalization of less than $2 billion as of November 2010. Mid cap companies with market capitalization of between $2 billion and $10 billion make 15 percent of the index, Graph2.
Freeport-McMoran Copper & Gold Inc. (NYSE:FCX) and First Solar Inc. (NASDAQ:FSLR) are the only two large cap companies, with market capitalization of $45.7 billion and $11.8 billion (11/3/10) respectively. Top ten companies by market capitalization as of November 3, 2010 are listed in the table below, Table 1.
The smallest company is Star Buffet Inc. (NASD: STRZ) with a market capitalization of $2.9 million, Table 2.
Arizona’s High-Tech, Manufacturing-Base
A breakdown by NAICS categories below reveals that the index is heavily weighted in manufacturing and particularly in the high-tech sector (Table 3). Over three-quarters of the publicly-traded firms in Arizona fall under the NAICS manufacturing categories, with seventy percent of them being computer and electronic products manufacturing and the remaining being in the chemical and food manufacturing sectors. All but two of the companies under the NAICS manufacturing classification (NAICS 31-33) are traded in the NASDAQ. Hypercom Corp. (NYSE:HYC) and Medicis Pharmaceutical Corp. (NYSE:MRX) are traded in the NYSE.
Technology companies such as First Solar Inc. (NASD:FSLR), Microchip Technology Inc. (NASD:MCHP), and ON Semiconductor Corp. (NASD:ONNN) led the charge, while firms like Mobile Mini Inc. (NASD:MINI) and Amerco (NASD:UHAL) rode the housing market upward, contributing to the Tech sub-index’s positive performance during the pre-recession period, Table 3.
L&D Arizona 13 Sub-Index
When assessed by exchange, it is evident that Arizona’s two exchange-specific sub-indices closely tracked the performance of the major market indices their companies belong to; the Dow, S&P 500 and the NASDAQ. The L&D Arizona 13 Sub-Index represents mining, utility, trade and transportation companies traded in the NYSE, Graph 3.
While the largest company, Freeport-McMoran Copper & Gold Inc. (NYSE:FCX) is represented here, it is not necessarily the biggest mover because the index is price-weighted. Popular companies include PetSmart Inc. (NYSE:PETM) and US Airways Group Inc. (NYSE:LCC).
The L&D Arizona 13 Sub-Index peaked on February 22nd, 2007 at a value of 111.90, representing an increase of nearly 12% since the base period of October 26, 2006. The date was selected as the base period in order to capture the effects of the latest recession and to provide the longest stock history for most companies in the index. The sub-index had peaked almost 4 months before the DJIA index and the S&P500 index (Graph 3 and 4). In hindsight, we know Arizona was one of the first states leading into the housing market crisis which later precipitated into a financial crisis and recession.
At its peak, the sub-index performed better than the L&D Arizona Composite index and L&D Arizona Tech sub-indices. However, the L&D Arizona Tech sub-index and the L&D Arizona Composite index went on to surpass the L&D Arizona 13 sub-index with more volatility and higher peaks later in the recession (Graph 5). The L&D Arizona Tech sub-index continued to thrive ten months after even after the L&D Arizona 13 sub-index began pricing in the housing market and financial crisis.
L&D Arizona Tech Sub-Index
A comparison of the performance of Arizona’s volatile technology stocks, as represented in the L&D Arizona Tech sub-index and the NASDAQ composite index suggests that, after riding at elevated levels throughout 2007 and into early 2008, the decline in stock prices was more rapid and severe for Arizona technology companies towards the end of 2008 (Graph 6).
Despite this precipitous decline in value Arizona’s tech companies’ performance remain in step, today, with the NASDAQ composite.
In general, the L&D Arizona Tech sub-index is more volatile than the NASDAQ Composite index, with higher up-swings and lower down-swings. The L&D Arizona Tech sub-index peaked prior to the recession on December 28th, 2007 at 149.7, representing nearly a 25% increase in 14 months and close to a 50% increase from October 26, 2006, the base date selected for the index.
The L&D Arizona Tech sub-index lags the NASDAQ Composite Index with the effect of the economic downturn being observed in the sub-index approximately 1 month after it registered in the NASDAQ Composite.
Index Performance
In order to compare the performance of the sub-indices with other market indices, the compound annual growth rate (CAGR) was calculated. The S&P Small Cap 600 was selected as the best benchmark to compare against the performance of the L&D Arizona Composite Index. This is because more than 75 percent of companies represented in the L&D Arizona index are small cap firms (market capitalization of < $2 billion).
The CAGR calculations suggest that the L&D Arizona Composite Index, and even more so the L&D Arizona Tech sub-index out-performed the benchmark of small-cap companies, the S&P Small Cap 600. The L&D Arizona Tech sub-index out-performed its benchmark of technology and growth companies, the NASDAQ Composite index. Small-cap, growth companies have generally led other companies out of a recession. This is evident in the L&D Arizona Tech sub-index and NASDAQ Composite Index which have performed better than other major indices over the last 4 years (Table 4).
The L&D Arizona Tech Sub-Index, performed much better than the L&D Arizona Composite Index as well as the L&D Arizona 13 Sub-Index. On the same note, the NASDAQ Composite Index performed better than other major, large-cap market indices.
Conclusion
The L&D Arizona Composite index illuminates Arizona’s exceptional high-tech cluster industries and the states strong manufacturing-base. It is difficult to deny that Arizona’s unique location as a border state continues to provide a competitive edge to companies exporting inputs or final goods to Mexico, Arizona’s top export destination, or globally.
Computer and electronic products, chemical and food manufacturing sectors do not only command the largest share in the L&D Arizona Composite index (75 percent), but were also among Arizona’s top 10 export categories in 2009. Export supporting industries in transportation and trade have also flourished as a result while mining, energy and solar continue to provide business opportunities in Arizona.
As show by the L&D Arizona Tech small-cap, growth companies continue to lead other companies out of the recession indicating the need to support small businesses at this critical time in order to drive employment.
Notes:
Compounded Annual Growth Rate (CAGR) Calculation
CAGR(t0,tn) = (V(tn)/V(t0))^(1/( tn- t0))-1
Where:
V(tn) = end value,
V(t0) = start value,
and tn- t0 = number of years since the base date set in October 2006
Such that V(tn) = V(t0) x (1+CAGR)^n
For additional information, please contact the Economic and Business Research Center.
