Meaning of “Tough Comps”
What does “tough comps” mean in hedge fund terms? I understand it is referring to the comparable companies of a name, but don’t necessarily understand what then being “tough” means. Have heard this term used many times by analysts.
It means short term traders are short a stock because they did too well last year. Definition of missing forest for trees
It usually means something compares unfavorably to something else, usually because the “something else” is an outlier of some sort.
For example, if Q1’2020 revenue was super high due to a one-off service, it’s a “tough comp” for Q1’2021.
Usually refers to same store sales growth. Tough comps means theres a time in the future where sss will lackluster compared to numbers put up today. You see it alot with grocery stores and 2021 possible reopening of dining, travel, etc
"Tough comps" is often misapplied, but makes sense as a way to think about some short-term modeling, given a few assumptions:
1. There's an "underlying trend" of growth for a company's KPIs (same store sales, organic revenue, etc.).As an example, let's say there is a 4% organic revenue trend for our example company
2. There are variations around that 4% CAGR in any given quarter for all sorts of one-off reasons (bad weather, employee strike, stimulus checks, etc.). Let's say, for argument's sake, that stimulus checks push up organic growth in 2Q20 to 7% growth, year over year. This 7% growth rate is a "tough comp" for next year.
3. As one "laps" the quarter in 2Q21, the underlying CAGR should effectively "re-assert" itself, all else equal, presuming there is no further stimulus. Thus, year over year growth should be ~1%, so that the 2 year trend is for growth to remain around that 4% CAGR.
There are lots of reasons why this isn't always a helpful way to think about growth, for instance: what if 2 years ago in 2Q19 there was another anomalous impact that threw off revenue growth in 2Q20? But thinking about comparisons can make it easier to understand whether a company is truly accelerating/decelerating, or whether the change in trend is an illusion.
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