Linköping University | Department of Management and Engineering Master Thesis in Business Administration, 30 credits | International Business and Economics Programme Spring 2019 | ISRN-nummer: LIU-IEI-FIL-A--19/03026--SE The Gladiators of the OMXSPI What are the key drivers trailing the durable performance? Jakob Cullhed Fredrik Olsson Supervisor: Øystein Fredriksen Linköping University SE-581 83 Linköping, Sweden +46 13-28 10 00, www.liu.se i Abstract Title: The Gladiators of the OMXSPI – What are the key drivers trailing the durable performance? Authors: Jakob Cullhed and Fredrik Olsson Supervisor: Øystein Fredriksen Background and problem: The impact on the stock market of macroeconomic factors have been analyzed in several earlier studies. These are forces constantly changing and thereby they contribute to changing the supply and demand of stocks. The fact that macroeconomic variables have affected the top performing stocks of the OMXSPI during 2004 – 2018, in terms of performance, plays an important part of the study. Different authors have recognized different factors to affect the stock price development and there has not yet been established an explanation of the determinants of stock prices. Purpose: The purpose of the study was to identify the stocks that continuously have had a development superior to the OMXSPI, and therefore have contributed the most to the development of the OMXSPI during 2004 – 2018. Moreover, the study analyzes the drivers that have contributed to the performance of these stocks. Furthermore, the study clarifies which factors that have contributed to the development of the P/E and the EV/EBITDA of the top performers. Methodology: The study followed a quantitative and deductive approach. The Swedish stock market was analyzed with a focus on the OMXSPI were the top performing stocks of this index were identified through a screening process. Moreover, the top performers were put against the OMXSPI in different time periods to compare the performance. Furthermore, multiples of these top performers and the sectors which they trade in were calculated in order to compare the multiples to each other, with the purpose of analyzing them relative to each other in different time periods. Conclusion: From the findings it could be established very similar patterns between the top performers and the OMXSPI. The difference mainly being that the top performers in every sequence experienced a superior development than the OMXSPI, but also greater declines during short sequences. Moreover, the tables displayed remarkable returns of the top performers and the aggregated top performers traded at premium levels in all analyzed time periods. Keywords: OMXSPI, top performers, stock price, drivers, P/E, EV/EBITDA, multiples ii iii Acknowledgements First and foremost we would like to take the opportunity to thank our tutor, Øystein Fredriksen. Without your valuable guidance and knowledge throughout the process of conducting this thesis, it would not have been possible. Moreover, we are grateful for the four years of studies at Linköping University which have nourished us with memories and knowledge for the times to come. Finally, we would also like to acknowledge the students participating in the tutoring seminars for valuable input which helped us improve our study during this first semester of 2019. Linköping, May 2019 Jakob Cullhed and Fredrik Olsson iv v Table of contents Introduction 1 1.1 Background .......................................................................................................................................... 1 1.2 Problem statement .............................................................................................................................. 3 1.3 Purpose of the study ............................................................................................................................ 5 1.4 Research questions .............................................................................................................................. 5 1.5 Delimitation ......................................................................................................................................... 6 Frame of reference 7 2.1 Efficient Market Hypothesis ................................................................................................................ 7 2.2 Capital Asset Pricing Model ................................................................................................................. 8 2.2.1 Risk free interest rate .................................................................................................................................. 9 2.2.2 Beta value .................................................................................................................................................... 9 2.2.3 Risk premium ............................................................................................................................................. 10 2.3 Low interest rate environment .......................................................................................................... 10 2.4 A trigger for multiple expansion ........................................................................................................ 11 2.5 Multiples ............................................................................................................................................ 13 2.5.1 Multiple expansion and multiple contraction............................................................................................ 14 2.5.2 P/E.............................................................................................................................................................. 15 2.5.3 EV/EBITDA.................................................................................................................................................. 16 2.6 Related studies .................................................................................................................................. 17 Methodology 21 3.1 Scientific approach ............................................................................................................................ 21 3.1.1 Quantitative ............................................................................................................................................... 21 3.1.2 Deductive ................................................................................................................................................... 22 3.2 Collection of Data .............................................................................................................................. 23 3.2.1 OMSXPI ...................................................................................................................................................... 23 3.2.2 Top performers .......................................................................................................................................... 24 vi 3.2.3 Outliers and extreme values ...................................................................................................................... 26 3.3 Choice of time period ......................................................................................................................... 27 3.4 Methodology delimitation ................................................................................................................. 28 3.5 Ethical principles ................................................................................................................................ 29 3.6 Research quality ................................................................................................................................ 29 3.6.1 Validity in quantitative research ............................................................................................................... 30 3.6.2 Reliability in quantitative research ............................................................................................................ 31 3.7 Method criticism ................................................................................................................................ 33 Empirical results 35 4.1 Economic development ..................................................................................................................... 35 4.1.1 GDP ............................................................................................................................................................ 35 4.1.2 Repo rate, risk premium and inflation ....................................................................................................... 37 4.2 Development of the OMXSPI ............................................................................................................. 39 4.3 Development and valuation of the top performers ........................................................................... 40 4.3.1 15 year period ............................................................................................................................................ 40 4.3.2 10 year period ............................................................................................................................................ 42 4.3.3 5 year periods ............................................................................................................................................ 43 4.3.4 3 year