Investors continue to bet on the outdoor sector, as recent trends show. Our Outdoor Brands Index provides an easy snapshot of the financials of publicly traded outdoor companies and shows us the health of the sector in real time.
The outdoor market continues to grow, and Covid has provided an extra boost. Trails are busier, gear is more sought after and consumer demand for outdoor clothing and equipment is higher than ever. But we can also have a metric to assess the changes in our industry in a simple way: rising stock prices.
Investors have been betting on outdoor equipment brands and producers in recent times, making these businesses grow, strengthen and increase the value they bring to society.
To better understand these market dynamics and what they mean for the industry, Artiga Partners has created the Outdoor Brands Index, an economic indicator that tracks the performance of the 15 publicly traded outdoor sporting goods and equipment companies.
Why do we need an outdoor index?
Why should we care about changes in the prices of a group of stocks? Whether you work for an outdoor brand, own a specialty retailer, an active tourism company or are a professional investor, knowing and understanding the changes in valuations over time of the most recognizable companies in the industry gives us a clear and accurate picture of the health of the industry as a whole.
Not only about the results that the giants of the industry are obtaining, but also about the prospects for the growth of the sector as a whole, the premium that investors are willing to pay and the prospects of risk and uncertainty that the global market can transmit to us in real time. Stock exchanges and indices such as the Outdoor Brands Index provide us with vital information to anticipate our investment, financing or marketing decisions.
The Outdoor Brands Index also provides a benchmark for small and medium-sized companies that manufacture similar products and sell in similar channels to the industry giants we list in the index. In addition, the index allows us to easily see what the expectations of the investment community are for the outdoor sector as a whole.
What is an Index?
An index is a way of measuring the performance of a group of assets, in this case a list of publicly traded companies and their share prices.
One of the best known indices in the world is the Standard and Poors 500. The SP500 tracks the overall performance of the 500 largest U.S. companies. If the average value of the 500 companies goes up, the SP500 goes up. If the average value of the SP500 companies goes down, the SP500 goes down.
How is an index calculated?
There are several formulas to calculate the evolution of a stock index. There are indexes such as the Dow Jones Industrial Average 30, which measures the evolution of share prices as a sum of shares. However, the most commonly used way to construct an index that reflects changes in the value of companies over time without being subject to changes such as stock splits is the market capitalization method.
To find this value, the number of shares outstanding is multiplied by the current market value of a single share of the company's stock. The use of this method gives a higher weighting to companies whose total market value is higher regardless of the price of a single share. Changes in the capitalization of the companies included in the index, either because new shares are issued or because the share price falls, are reflected in the index on a proportional basis.
The weight of each component in the index is determined by the capitalization of each company; the greater the capitalization, the greater the weight and the greater the relevance of its changes in value in the performance of the index.
What are the main world indexes?
Among the best known stock market indexes in the world we can find the following:
- Dow Jones Industrial Average
- S&P 500
- EURO STOXX 50
- Nasdaq 100
- FTSE 100
- Ibex 35
- DAX 30
- CAC 40
- Nikkei 225
- Hang Seng
What drives index prices?
The movement of index prices depends on many factors:
- Company news and results
The results of companies are what ultimately drive their share price up or down over time and by extension affect the performance of the index (or indices) in which they are included. Depending on the weight that each company in question has in a given index, the impact on final performance can range from minimal to moderate. The indexes adjust the weight of each component according to its market capitalization, so that when the performance of a stock is poor, the relative weight in the composition of the index tends to be lower and lower.
- World economic outlook
Events such as natural disasters or pandemics have a negative impact on an index by affecting the economy of the affected country or sector. Economic events and meetings such as central bank decisions on interest rates, trade agreements and employment indicators are also relevant variables that affect the entire market. Global economic growth, inflation prospects and credit supply are some of the most important indicators in predicting future movements of an index.
- Raw materials
Some companies within an index may have a high exposure to changes in commodity prices. These fluctuations, generally very violent, can result in very volatile share prices and by extension affect the construction of the index.
- Structural changes in the index itself
The indexes restructure their components when there are changes in the industry or in the companies that make up the index. When a company loses a certain market capitalization, it is possible to exclude it from the index to include another company with a larger capitalization, thus including the stocks with the largest capitalization in the industry on a permanent basis. When a company's shares are added to or removed from a stock index, the price of the index may undergo some changes.