In my previous post, I tried to rank all the stocks that are included in the S&P 500 index by the sum of their dividend and earnings yields. In this article, I did the same for all stocks that are included in the S&P MidCap 400 index.
S&P MidCap 400
The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index covers over 7% of the U.S. equity market, and seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis
The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The earnings yield is used by many investment managers to determine optimal asset allocations.
I used the Portfolio123's powerful ranking system to grade all S&P MidCap 400 stocks based on this theme. All the data for this article were taken from Portfolio123.
The ranking system that I built searched for the best 20 stocks that are included in the S&P MidCap 400 index by the sum of their dividend and earnings yields. For the earnings yield, I used the average of the inverse of the trailing P/E ratio and the inverse of the forward P/E ratio.
After running the ranking system on May 07, 2013, before the market open, I discovered the following 20 stocks:
Synovus Financial Corp.
Apollo Investment Corp
Valassis Communications Inc.
New York Community Bancorp Inc.
Reinsurance Group of America Inc.
Valley National Bancorp
Everest Re Group Ltd
Protective Life Corp
Alliant Techsystems Inc.
Arrow Electronics Inc
Federated Investors Inc.
Fidelity National Financial Inc
Tech Data Corp
Lexmark International Inc.
The table below presents the 20 companies, their last price, their market cap and their industry.
The table below presents the trailing earnings yield, the forward earnings yield, the average earnings yield, the dividend yield and the sum of the average earnings yield and the dividend yield for the 20 companies.
In order to find out how a portfolio based on this ranking system would have performed during the last year, last five years and last 14 years, I ran the back-tests, which are available by the Portfolio123's screener.
The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.
One year back-test
Five years back-test
14 years back-test
The best S&P MidCap 400 stocks in terms of the sum of dividend and earnings yield have given much better returns during the last year, the last five years, and the last 14 years than the S&P 500 benchmark. The Sharpe Ratio, which measures the ratio of reward to risk, was also much better in all three tests. The one-year return of the screen was 26.95% while the return of the S&P 500 during the same period was 17.46%. The difference between the best S&P MidCap 400 stocks screen to the S&P 500 benchmark was much more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 13.40% while the average annual return of the S&P 500 index during the same period was only 1.89%. Although this ranking system has given superior results, I recommend readers use this list of stocks as a basis for further research.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.