Sunday, June 22, 2014

Continuing the Portfolio Descriptions

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Update on Shooting Stars

In my previous entry I described the Shooting Stars portfolio, which I've developed to test the theory that stocks coming out of Stage 1 and into Stage 2 are significant.  The key of that portfolio is to select quality stocks that have accelerating sales and earnings on a quarter-over-quarter basis.  I started the portfolio "officially" on May 2 and May 5, and added another variant this past weekend.  Here, "officially" means that I started an official tracking/audit of every transaction, inclusive of commissions.

There are three portfolios that are using the accelerating sales and earnings rules:  one that looks at the present universe of qualified stocks that meet the Shooting Stars criteria and selects those that are projected to grow at a CAGR of at least 15%, another that uses the entire universe of qualified stocks without the 15% CAGR requirement (but still meeting the Shooting Stars requirements), and the third uses high-beta components only of the shooting stars universe, e.g. calculated beta has to be higher than the market beta (which by definition is 1).

As of the close of June 20 we have:

Shooting Stars 15% CAGR:

  • Realized gains/(losses):  -2.1%
  • Unrealized gains/(losses):  +0.5%
  • 22% invested
Shooting Stars All:

  • Realized gains/(losses):  -1.9%
  • Unrealized gains/(losses):  +4.4%
  • 77% invested
Shooting Stars HiBeta:
  • Realized gains/(losses):  N/A
  • Unrealized gains/(losses):  N/A
  • 0% invested (orders will be executed starting Monday)
The GGT recommendation for individual stocks controls the amount of cash in the portfolio, and the 15% CAGR has a high number of stocks that are being held in cash.  Details are in the GGT stock file, which is in the shared Dropbox directory.  Send a note to pduncan [at] v t {dot} e  d  u  with "Dropbox" in the subject line if you want access to the files.

For the three portfolios, allocations are made by optimizing the Sharpe Ratio of ALL possible holdings and then only buying those that are in some form of GGT "long" status.  Note that the act of optimizing potentially removes some of the candidates from the pool, in that additional stocks either worsen gain and/or portfolio volatility.  Hence, the process of optimizing allocation removes stocks that have a really poor reward/risk ratio as measured over the past year.

Selling of individual stocks will occur based on my nightly scans.  Same goes for purchases that are signaled via a GGT "New Long" recommendation.  Reallocation, and additional scans for stocks that fit the universe criteria happen every couple of weeks or so, time permitting.

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Steady Eddies

Steady Eddies is my long-term, low-maintenance portfolio concept.  Unlike most of my portfolios, this one does not subscribe to the accelerating EPS and sales requirement, although it does require growth in both of these components over a much longer time period than consecutive (trailing) quarters.  In fact, it requires incredible stability on a 10 year time frame for EPS and sales, and out of the universe of stocks only 9 (nine) make the cut right now.  Here's the exact selection strategy:

  • Must be on a US exchange
  • A linear fit to the 10 year revenue growth using yearly numbers must have a R-squared of greater than 0.95
  • A linear fit to the 10 year EPS growth using yearly numbers must have a R-squared of greater than 0.95
  • The current price, when compared to the projected "high" price using the EPS projection determined above, must provide at least a 2:1 upside in the next 5 years.
I've been tracking this portfolio for almost a year and it lives up to it's name.  It just plods along.  Without the GGT influence on the individual positions the portfolio swings with the market as a whole -- up a few/down a few.  With GGT timing individual stocks it appears that there is between a 20 to 25% reduction in volatility compared to the always-long approach, which is why I'm interested in this portfolio strategy.  Although some positions are held in cash and this limits the overall gains of the always-long stance, the returns seem to be very stable on a longer term.  We'll see.

Although the stocks are in the Dropbox file I'll list them here for your consideration:

AAPL, BRLI, CERN, CTSH, FFIN, JKHY, LKQ, MWIV, PNRA

Note that CERN, LKQ, MWIV, and PNRA are currently in GGT "cash" status.

Like Shooting Stars, there are multiple portfolios here.  The basic portfolio (Fully Invested) invests in the full  list of 9 (nine) above, timed with GGT.  The second portfolio is the 15% CAGR methodology, and presently, the only stocks on that list are AAPL, BRLI, CTSH, and LKQ.  As I stated above, LKQ is in "cash".  I officially started logging these two portfolios on May 5th.

Here are the performance numbers:

Steady Eddies 15% CAGR:

  • Realized gains/(losses):  -2.2%
  • Unrealized gains/(losses):  +2.8%
  • 67% invested
Steady Eddies Fully Invested:
  • Realized gains/(losses):  -0.8%
  • Unrealized gains/(losses):  +2.1%
  • 75% invested
For both portfolios, allocations are made by optimizing the Sharpe Ratio of ALL possible holdings and then only buying those that are in some form of GGT "long" status.  The allocations are listed on the "Portfolio" tab of the Excel workbook in the Dropbox folder that I described above.

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In a future entry I'll describe the "Greenfield" portfolios, which are presently outperforming everything else I am running.  

Let me know if you have any questions!

Regards,

pgd