Our Top Names Versus The Market

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Each week since June 8th, we’ve been presenting the top 10 names in Portfolio Armor‘s daily ranking to subscribers of a service we run on another site. The performance of our top 10 names from June 8th and eight subsequent weekly cohorts exemplifies the alpha our security selection delivers, as we elaborate below.

How Our Security Selection Method Works

In a nutshell, here’s how our method works. First, we apply our 2 screens to avoid bad investments. Then, for the securities that pass both screens, we start with the assumption that securities will begin to revert to their long term average returns over the next several months, and then we use our gauge of option market sentiment as a “sanity check” on that to arrive at a potential return estimate. We then subtract the cost of hedging from each potential return, and rank every name by potential return, net of hedging cost. The top 10 names each week refer to the top 10 names on that ranking.

June 8th Top 10

Our top 10 names on June 8th, presented in this post, were Align Technology (ALGN), Apple (AAPL), Nvidia (NVDA), MercadoLibre (MELI), Ilumina (ILMN), Netflix (NFLX), Electronic Arts (EA), Straight Path Communications (STRP), Priceline (PCLN), and LuluLemon (LULU). Here’s how they’ve performed since, versus SPY:

Our Top 10: up 9.94% 

SPY: up 5.62%

June 16th Top 10

Our Top 10 on June 16th, presented in this post at the time, were Brinks (BCO), CSX (CSX), TAL Education (TAL), Activision Blizzard (ATVI), Lam Research (LRCX), IAC/Interactive Corp (IAC), Nvidia, HDFC Bank (HBD), JD.com (JD), and NetEase (NTES). Here’s how they’ve performed since, versus SPY.

Our Top 10: Up 18.86%

SPY: Up 5.6%

June 22nd Top 10

Our top 10 on June 22nd, presented in this post at the time, were Alibaba (BABA), TAL, IAC, Coherent, Inc. (COHR), ALGN, ATVI, BCO, Wynn Resorts (WYNN), HDB, and NTES. How they’ve performed since, versus SPY:

Our Top 10: Up 18.19%

SPY: Up 5.51%

June 29th Top 10

Our top 10 names on June 29th, presented in this post at the time, were ATVI, ALGN, ServiceNow (NOW), CSX, TAL, Vantiv (VNTV), HDFC Bank (HDB), IPG Photonics (IPGP), Regeneron (REGN), and Priceline (PCLN). How they’ve performed since, versus SPY:

Our Top 10: Up 16.83%

SPY: Up 6.16%

July 7th Top 10

Our top 10 names on July 13th, presented in this post at the time, were ALGN, ATVI, NOW, BCO, IPGP, HDB, CSX, ILG (ILG), REGN, and Bob Evans (BOBE). How they’ve performed since, versus SPY:

Our Top 10: Up 13.95%

SPY: Up 5.83%

July 13th Top 10

Our top 10 names on July 13th, presented in this post at the time, were ALGN, Waters (WAT), ATVI, JD, NVDA, Intuitive Surgical (ISRG), IPGP, BCO, PCLN, and ILG. How they’ve performed since, versus SPY:

Our Top 10: Up 11.61%

SPY: Up 4.83%

July 20th Top 10

Our top 10 names on July 20th, presented in this post at the time, were ALGN, IAC, JD, NOW, ISRG, MELI, Netflix (NFLX), IPGP, REGN, and Cooper (COO). How they’ve performed since, versus SPY:

Our Top 10: Up 6.5%

SPY: Up 3.69%

July 27th Top 10

Our top 10 names on July 27th, presented in this post at the time, were ALGN, REGN, JD, IAC, NVDA, IPGP, NFLX, MELI, PayPal (PYPL), and Ellie Mae (ELLI). How they’ve performed since, versus SPY:

Our Top 10: Up 5.36%

SPY: Up 3.65%

August 3rd Top 10

Our top 10 names on August 3rd, presented in this post at the time, were ALGN, TransUnion (TRU), BABA, PYPL, Boeing (BA), Changyou (CYOU), 58.com (WUBA), Aaron’s (AAN), Cognex (CGNX), and BCO. How they’ve performed since, versus SPY:

Our Top 10: Up 12.45%

SPY: Up 3.75%

Is This Random Luck?

We don’t expect to beat the market all the time, but these results so far are consistent with our previous tests showing that our security selection method delivers alpha. What are the odds that the top 10 names we presented in 9 separate weeks, from June 8th to August 3rd, would all be, on average, outperforming the market up until now simply due to random luck? Pretty slim, no?

Consider Hedging

Given the returns shown above, readers might wonder whether it makes sense to simply buy our top 10 names in a given week and not hedge, perhaps staggering your investment into a few different tranches over time. You would probably do quite well with that strategy in a bull market, but we wouldn’t recommend that anyone other than the most aggressive investors consider it: In the event of another 2008, you could suffer severe declines. For everyone else, we’d suggest using hedged portfolios. Your returns will be a bit less if the bull market continues, but your risk will be strictly limited in the event it doesn’t.

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