An Objective Look At The Performance Of Seeking Alpha's Alpha-Rich Articles

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 |  Includes: ADK, AHC, AIQ, ALC, AM-OLD, ANN, ATX, BBW, BODY, CACC, CACH, CCL, CHS, CST, EC, EMG, FNF, GME, GPT, HGG, HYGS, IMMR, IMOS, INTX, LAKE, LCAV, LOCK, MAG, MBND, NRF, NWY, ORN, PKX, PRXI, RAS, RYL, SATS, SBY, SDRL, TPL, UFPT, UHAL, UNTD, WHX, WSM, XRDC
by: Kevin Babb

In this article, I will outline how a portfolio based on following the Alpha-Rich articles on Seeking Alpha would perform. Specifically, I will look at a portfolio based on investing $1000 dollars in every Alpha-Rich trade idea between Jan 1, 2013 and May 31, 2013, the first five months of the year.

Alpha-Rich articles are Seeking Alpha's best long and short ideas, handpicked by the editors, and available to Alpha Pro Subscribers one day early. Since May 20th, Seeking Alpha has focused the program more around clear, compelling quantifiable opportunities rather than undiscovered, high reward picks.

Such an objective analysis of past returns is an important exercise and is very educational for investors to consider. Sometimes articles can be very convincing and yet be entirely inaccurate, either because of an oversight in analysis or the uncertain nature of financial markets. But as investors, our job is to analyze the information we receive and objectively decide if it is good or bad.

Part of that analysis is backtesting stock picks. I hope that the following backtest will prove educational for investors.

First, a couple points about methodology:

  • I am taking the initial investment price as the most immediate closing price following the articles release to the general public of non-subscribers. (i.e. if the article was published on Saturday, I take Monday's close). Some stocks did have big jumps after publication to Seeking Alpha Pro subscribers but before release to non-subscribers.
  • I am assuming buy-and-hold strategy, with investors holding their position ever since the article first was made available to the public. For this reason, some stocks that initially showed good returns after being published do not show as impressive returns below.
  • Assisted Living Concepts (NYSE:ALC) and Metro PCS (PCS) were acquired, so I used the most recent price I could find. In general, this method of backtesting leaves out context, and it is quite possible that trading with attention to context instead of simply buying and holding would enhance an investors return.
  • For short calls, the portfolio assumes borrowing $1000 of stock, with no margin requirement beyond $1000 required
  • For the one pair trade, I assume going long $500 of INTX and short $500 of LOCK
  • Data taken from Yahoo Finance and MarketWatch, current prices are as of July 23rd, 2013.

There, now that all the details are out of the way, here is what I found:

Stock

Position

Date published

Current Market Cap

Initial Price

Price Now

Return

Assisted Living Concepts (ALC)

Long

1/4/2013

240.88M

$ 9.72

$ 11.98

23.25%

Build-A-Bear (NYSE:BBW)

Short

1/29/2013

113.69M

4.19

6.94

-65.63%

A.T. Cross Company (NASDAQ:ATX)

Long

2/12/2013

235.80M

12.27

18.29

49.06%

Gramercy Property Trust (NYSE:GPT)

Long

2/12/2013

286.19M

3.68

4.73

28.53%

Amerco (NASDAQ:UHAL)

Long

2/15/2013

3.34B

151.82

168.90

11.25%

GameStop (NYSE:GME)

Short

2/21/2013

5.06B

24.73

42.42

-71.53%

New York and Co (NYSE:NWY)

Long

2/22/2013

406.52M

4.33

6.43

48.50%

Osage Exploration (OEDV.OB)

Long

2/28/2013

51.34M

1.70

1.01

-40.59%

Orion Marine Group (NYSE:ORN)

Long

3/5/2013

362.10M

10.02

13.43

34.03%

Chico's FAS (NYSE:CHS)

Long

3/7/2013

2.64B

17.26

16.78

-2.78%

Credit Acceptance (NASDAQ:CACC)

Short

3/7/2013

2.72B

122.81

113.17

7.85%

AH Belo (NYSE:AHC)

Long

3/15/2013

176.46M

5.24

7.99

52.48%

Williams-Sonoma (NYSE:WSM)

Long

3/25/2013

5.74B

50.54

59.03

16.80%

ChipMOS (NASDAQ:IMOS)

Long

3/28/2013

487.12M

13.32

16.65

25.00%

EchoStar (NASDAQ:SATS)

Long

3/28/2013

3.64B

38.97

40.87

4.88%

Alliance Healthcare Services (NASDAQ:AIQ)

Long

4/1/2013

191.50M

7.75

18.64

140.52%

Body Central (OTCQB:BODY)

Long

4/2/2013

206.26M

9.25

12.76

37.95%

Premier Exhibitions (NASDAQ:PRXI)

Long

4/2/2013

86.34M

2.74

1.77

-35.40%

Pair trade: Long INTX and Short LOCK

4/2/2013

avg

Long INTX

167.78M

9.87

9.28

-10.26%

Short LOCK

939.78M

9.42

10.79

Metro PCS

Long

4/2/2013

-

11.02

11.69

6.08%

United Online (NASDAQ:UNTD)

Long

4/3/2013

741.00M

6.07

7.95

30.97%

Cache (NASDAQ:CACH)

Long

4/11/2013

60.45M

3.85

4.39

14.03%

Fidelity National Financial (NYSE:FNF)

Long

4/18/2013

5.54B

25.94

24.60

-5.17%

American Greetings (NYSE:AM-OLD)

Long

4/29/2013

615.13M

18.36

19.03

3.65%

LCA-Vision (NASDAQ:LCAV)

Long

4/30/2013

59.09M

3.40

3.13

-7.94%

Posco (NYSE:PKX)

Long

5/8/2013

21.67B

74.82

72.47

-3.14%

Terago (TGO.TO)

Long

5/9/2013

82.20M

6.74

7.00

3.86%

CST Brands (NYSE:CST)

Long

5/15/2013

2.41B

32.96

32.12

-2.55%

Adcare Health Systems (NYSEMKT:ADK)

Short

5/17/2013

67.85M

5.08

4.83

4.92%

Imperial Holdings (IFT)

Long

5/17/2013

148.53M

6.65

7.00

5.26%

hhgregg (NYSE:HGG)

Short

5/21/2013

478.67M

13.75

15.18

-10.40%

Ryland Group (NYSE:RYL)

Short

5/21/2013

1.88B

48.43

40.99

15.36%

NorthStar Realty Finance (NYSE:NRF)

Long

5/21/2013

1.96B

9.48

10.02

5.70%

Silver Bay Realty Trust (NYSE:SBY)

Short

5/22/2013

634.04M

18.24

15.95

12.55%

Multiband (NASDAQ:MBND)

Long

5/22/2013

69.35M

3.20

3.20

0.00%

SeaDrill Limited (NYSE:SDRL)

Long

5/22/2013

20.21B

40.39

43.19

6.93%

Lancashire Holdings Limited (OTCPK:LCSHF)

Long

5/23/2013

2.00B

12.15

12.35

1.65%

GameStop

Short

5/23/2013

5.06B

36.01

42.67

-18.49%

Hydrogenics (NASDAQ:HYGS)

Long

5/24/2013

114.17M

10.21

14.10

38.10%

RAIT Financial Trust (NYSE:RAS)

Long

5/24/2013

528.20M

8.24

7.58

-8.01%

ANN (NYSE:ANN)

Long

5/25/2013

1.54B

30.82

33.17

7.62%

Carnival (NYSE:CCL)

Long

5/25/2013

28.30B

33.00

36.74

11.33%

Ecopetrol (NYSE:EC)

Long

5/29/2013

94.63B

44.44

46.15

3.85%

Immersion (NASDAQ:IMMR)

Long

5/29/2013

401.72M

14.72

14.35

-2.51%

Whiting USA Trust (NYSE:WHX)

Short

5/29/2013

65.99M

4.75

4.78

-0.63%

Texas Pacific Land Trust (NYSE:TPL)

Long

5/31/2013

741.10M

81.83

84.46

3.21%

UFP Technologies (NASDAQ:UFPT)

Long

5/31/2013

144.35M

19.19

21.17

10.32%

Terago (TGO.TO)

Long

5/31/2013

82.2M

7.24

7.00

-3.31%

Keating Capital (KIPO)

Short

5/31/2013

54.97M

6.50

5.87

9.69%

Magnetek (NASDAQ:MAG)

Long

5/31/2013

57.83M

16.65

18.10

8.71%

Lakeland Industries (NASDAQ:LAKE)

Long

5/31/2013

25.27M

3.98

4.51

13.32%

Avg Return

8.02%

Median Return

5.70%

Click to enlarge

If you had followed this procedure, your original $53,000 invested would now be $57,346. Meanwhile the S&P has returned 15.73% from the beginning of the year to now, turning the original $53,000 into $61,337.

While this may look bad for Alpha-Rich articles, it's really not as bad as it seems for several reasons. Firstly, quite a few of the Alpha-Rich articles have come out recently, especially at the end of May. Many of the articles call for long lead times for their ideas to come to fruition, so judging them after several months, while still informational, is not the end-all be-all judgment.

But even more than that, what we really care about is the annualized rate of returns. Because Alpha-Rich articles have come out recently, a portfolio of investing $1000 in every Alpha-Rich stock idea hasn't had as long to grow as a portfolio that just invested $53,000 on the first trading day of 2013.

Also note I am neglecting dividends. While most of the stocks picked have zero or negligible dividends, some dividends are significant. But since the time frame is relatively short the error is probably less than 2%.

So basically, it isn't a completely apples-to-apples comparison. Rather, the Alpha-Rich articles' return over this period should be looked at more as a minimum of what is achievable over the time period. It is by no means a maximum.

Despite the imperfections, I think this exercise demonstrates one very valuable lesson for managing your portfolio: question everyone! There were some very good ideas that came from Alpha Rich articles; there were also many that did not come to fruition. There were relatively few ideas that came to fruition to the full magnitude predicted (at least not as of writing). Clearly, it is a very naive investor who follows any one source without independent thought. Nonetheless, it is the opinion of the author that Alpha Rich articles offer a good source of potential trading ideas, and an excellent example of thoughtful analysis.

Conclusion

Seeking Alpha's Alpha-Rich articles can undoubtedly provide some very good investment ideas, but they are not a guaranteed thing. Investors are advised to use them as a resource to aid their decision making. I will follow up in another article to see how this portfolio of stocks continues to do as their ideas are given more time to come to fruition.

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.

Additional disclosure: I have no positions, nor have I ever had an article chosen as an Alpha-Rich article.