business description item1 fluidity
What it checks
When a company materially changes its Business (Item 1) description vs the prior year, it usually signals competitive flux — and underperformance.
Mechanism
Item 1 (Business) Y/Y vocabulary churn proxies for HP product-market fluidity. Higher Jaccard distance own-z = more competitive flux around the firm; predicts forward profitability declines.
Signal rule
sec_10k_sections.item_1_text Jaccard Y/Y distance own-z >= 1.0 -> SHORT 90/180d
Data dependencies
daily_pricesAdjusted-close OHLCV for every US-listed ticker; primary price feed.
sec_10k_sectionsWorker data table — see services/worker schema.
Expected edge
- Paper alpha
- ~3% over 6-12mo on top-decile fluidity
- Paper window
- T+1 to T+180d
Hoberg-Phillips 2016: ~3% over 6-12mo on top-decile fluidity (firms repositioning into crowded competitive zones).
Related families
lazy pricesEventStocks whose 10-K (or 10-Q) text barely changes year-over-year OUTPERFORM those with big language shifts. The intuition: boring filings ≈ stable business ≈ slow-and-steady cash flow. Big text changes signal management hiding bad news with new boilerplate. Effect size: ~0.4 Sharpe alone, still replicating in 2020-2024. Long when the most recent 10-K's cosine similarity to prior year is in the top quartile (≥ 0.85); hold ~12 months until the next filing.
lazy prices shortEventFirms rewriting 10-K sections year-on-year signal regime change. Cohen et al. find shorting 'changers' yields up to 188bps/month — the asymmetry is strong: most alpha lives in the SHORT leg. Adds section-resolved diff (Item 1A risk-factors, Item 7 MD&A) over whole-document cosine.
filing text deltaText-NLPYear-over-year change in uncertainty/risk language in 10-K Item 1 ('Business' section). Spike in 'may', 'could', 'uncertain', 'challenging', 'risk' tokens per 10K words → management is privately more cautious → forward earnings miss / underperformance. Stable or decreasing language → quietly confident outlook → outperform.
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