Tactical Advantage
Generating alpha through satellite imagery
A bird’s-eye view
In November 2006, a renegade force in the Democratic Republic of the Congo was moving to attack Goma, the capital of North Kivu. Earlier that month, the renegades had shelled nearby towns, killing at least 25 civilians, and causing hundreds of thousands of other Congolese civilians to flee the surrounding areas.
The United Nations had an active peacekeeping force stationed in the area. Due to the infrared sensors of the operation’s Mi-35 helicopters, the renegades’ movement was detected ahead of time, and a UN-DRC force successfully stopped the renegades from advancing into the capital, protecting the inhabitants of Goma.
Walter Dorn, Professor of Defence Studies at the Royal Military College of Canada, notes, “ground-level surveillance is obviously indispensable for gaining situational awareness, but there are distinct advantages to observation from the air.” The United Nations’ aerial intelligence provided its personnel with critical information necessary to pre-empt the attack on Goma.
Historian Mike Bechthold remarks that there is a “wealth of information which an experienced interpreter can glean from an air photo...dug-in tanks, mortar positions, trenches and the position of friendly troops. The photo interpreter does not rely strictly upon one photo, but will base his assessment on comparisons...to find changes, pilot observations, and intelligence supplied by the ground forces.”
However, the tactical advantage provided by having a bird’s-eye view extends far beyond military operations. It can even be applied as a source of alternative data in the identification of promising investment opportunities.
One car, two cars, red car, blue car
One of the buy-side applications of satellite imagery most frequently featured in headlines is parking lot and foot traffic surveillance. Simply counting the cars shown in store parking lots helps predict retailer revenues.
In June 2017, Amazon stated it would acquire Whole Foods, and promptly cut product prices, with an additional 10% off for Amazon Prime members. After competing supermarket chain Kroger’s stock price sank 17.5%, analysts considered it unlikely to fall further, but satellite data painted a different story: traffic to Kroger locations tanked another 7.3% from August to September, suggesting that the effect of the deal would be much more severe than originally anticipated. True to the warning signs, Kroger’s stock had fallen nearly 35% by market close on September 7th, 2017.
A study at the Haas School of Business found that “abnormal changes in parking lot fill rates positively predict short-window returns centered on the earnings announcement day, typically three trading weeks after the quarter end.” In 2016, J.P. Morgan also used satellite imagery to compare parking activity at American retailers pre- and post-election. The drop in cars the company observed enabled it to conclude that year-over-year “activity trends worsened post the election contrary to stock market moves.”
Taking stock from above
Satellite imagery provides a powerful understanding of company inventories, particularly for those dealing with natural resources such as crude oil. Using satellites, firms can assess storage tank capacity, track oil tankers, and catch flaring activity in oil fields. New York firm Ursa Space Systems is monitoring the impact of COVID-19 on oil inventories across the world, generating weekly updates on “11,000 oil storage tanks observed with Synthetic Aperture Radar (SAR) satellites.” Although this data costs thousands of dollars each month, many investors find it worthwhile to obtain.
The information is especially useful for stocks outside of the United States, where inventory data is often opaque. Hedgeye Research’s senior energy policy analyst, Joe McMonigle, says, “Some governments are more transparent and better at disclosure, and some are not. So you really need this alternative data to have some kind of transparency or insights into what actually is going on, on the ground.”
Geoffrey Craig, a global energy analyst for Ursa, says, “satellite imagery has been invaluable in tracking oil inventories outside the US where public data isn’t available or timely.” Orbital Insight analyzes data from over 200 satellites globally, refining the information into actionable insights for its clients. Orbital’s satellite coverage includes almost 6 billion barrels of oil storage capacity. Having access to this imagery provides the company’s clients with “granular analyses of oil inventory levels and refinery outages in the United States, China, and even [the Organization of the Petroleum Exporting Countries (OPEC)].”
Cloudy with a chance of price determination
Environmental conditions are another factor which satellite imagery can shed light on. Over a decade ago, The Quarterly Journal of Economics detailed how the usage of satellite imagery in India had established a relationship between rising demand for certain forestry products and forest growth rates. Since then, satellite imagery has been leveraged with increasing frequency to assess the land, water, and skies.
An equity research team at UBS used “satellite, unmanned aerial and other imagery and sensors to assess China’s air quality in 2,186 locations to determine the winners and losers in the petrochemical industry given the Chinese government’s new air pollution campaigns.” China’s move to increased government inspections and control over industrial chemical production targeted 28 major cities, including Beijing. By monitoring the air in these cities daily, UBS was able to forecast the impacts on chemical production. From there, the team identified which companies would come out as the winners in the European and American chemical industries. Arkema S.A. and Evonik Industries, for example, were predicted to outperform in Europe, as they were “exposed to more constrained commodity chemicals production and their non-China operations could significantly benefit from higher global industry pricing.”
Making sense of the big picture
The investment value of satellite imagery can be nebulous. John Chisholm, Chief Investment Officer at Acadian Asset Management, asks, “how consistently does foot traffic translate into retail sales? And even if it does, is the earnings impact already discounted by analysts?” Naturally, when satellite imagery is used, it must be considered in conjunction with more traditional means of data collection such as SEC filings to effectively inform investment decisions.
As the usage of satellites becomes more prevalent, how will this change the landscape of investing? Does it make markets more efficient, or does it only widen the information gap for the novice investor, who cannot gain access to the same kind of insights?
Although satellite data can confer a significant advantage onto its holders, this does not mean its usage must be prohibited; satellite data should be viewed as one of many methods through which more information can, over time, potentially be made available to every investor. Currently, this data comes at a steep price. As more investors begin to incorporate satellite data into their research, it will become cheaper to obtain, and ultimately, nudge share prices a little closer to an accurate reflection of a company’s true value. While there are many questions surrounding alternative data left to be answered, one thing is certain: we have only scratched the surface.