Author: mungofitch

Subject: A SPY alternative screen

Date: 5/24/2020

Recommendations: 36

This is a retirement portfolio kind of screen: LargeCapCash. The goal is a screen which is as safe as the S&P 500 but with the hope of somewhat higher returns over the long run. This specific screen has low turnover, lower concentration risk than the S&P with largest position at 2.5% of portfolio, probably significantly lower company specific risk because of requirement of very strong balance sheet and profitability. And a very strong large cap bias. The screen: Start from the Value Line 1700--this is old skool! Of those with a reported ROE, take the top 30%--around 475 companies on average. For each one, calculate their cash balance in excess of long term debt. Buy equal dollar mounts of the 40 stocks with the largest net cash balances. That`s it. Note: this uses largest cash balances in absolute terms, not largest cash balances as fraction of market cap...that`s why it`s a large cap screen. The version I like best is buy top 40, hold two months. Hold till drop at rank 45. Rebalance annually. Result: January 1997 through April 2020, with 0.4% trading costs, CAGR of 14.1% SPY same date range: CAGR 7.9% Improvement: 6.2% It beat the S&P 500 in 74% of rolling years. That`s pretty steady...it wasn`t just one anomalous stretch of outperformance in one specific era. The relative-to-market rolling year performance ranged from 15% worse to 48% better. 10th / 50th / 90th percentiles relative to market -3% / +4% / +17%. That`s a surprisingly high return backtest for what (largely) amounts to a very large cap screen. These are the top ranks at the moment, in "cash above debt" order. GOOG MSFT FB AMZN SNE TSM CSCO GE BABA HUM NVDA AAPL ACN TROW EA COST VRTX INFY MU ADBE For a metric of the large cap bias: the current top 40 screen tickers account for 24% of the S&P 500`s market cap. Notice also that for a smaller cap company to make the cut, it would have to have a really huge amount of cash for its market cap, so it`s probably a robust firm. The Value Line set includes a few firms outside the US. The screen backtests a bit worse if you require that the stocks be US domiciled. Average dividend yield at the moment is 1.16%...fairly low. The average among the Value Line universe is 2.00% at the moment. ----------- version 2 ----------- If you like a dividend, just require that the dividend be positive as an extra first step. The "top 30% of companies by ROE" step therefore becomes "top 30% of dividend payers by ROE" In backtest the returns are actually a whisker higher (0.1%). Odds of beating SPY in a rolling year rises to 88%, the worst rolling year backtests a little less painful at only 5% worse than SPY. For that version, the average yield of the top 40 picks right now is 2.22%. The average market cap is smaller for this version, as some giant no-div firms get eliminated. More than anything else it depends on whether you prefer dividends or not. ----------- version 3 ----------- The outperformance of the dividend version (in backtest!) is steady enough that it makes a nice long/short hedged portfolio. 100% long the screen, plus short some SPY. e.g., long the dividend version and 50% short SPY still returned CAGR 10.4%, beating SPY by 2.5%/year, but with 51% of the risk of SPY (risk metric DDD3). 10th and 90th percentile of rolling year returns are -2% and +22%, standard deviation 11%. The figures for SPY are -16% to +26%, standard deviation 17%. That`s assuming you rebalance the long/short ratio to 100/50 each month. I wouldn`t go short 50% SPY, but it shows the idea. These are the "hedged" performance figures relative to SPY in the last few years. 2008 -0.7% 2009 +26.2% 2010 +0.4% 2011 -9.5% 2012 +8.9% 2013 +5.7% 2014 +8.5% 2015 -1.3% 2016 +5.3% 2017 +12.3% 2018 +7.5% 2019 +10.6% YTD +6.6% (to May 4) Jim