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 (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:
Current Market Cap
Assisted Living Concepts (ALC)
A.T. Cross Company (ATX)
Gramercy Property Trust (GPT)
New York and Co (NWY)
Osage Exploration (OTCQB:OEDV)
Orion Marine Group (ORN)
Chico's FAS (CHS)
Credit Acceptance (CACC)
AH Belo (AHC)
Alliance Healthcare Services (AIQ)
Body Central (BODY)
Premier Exhibitions (PRXI)
United Online (UNTD)
Fidelity National Financial (FNF)
American Greetings (AM)
CST Brands (CST)
Adcare Health Systems (ADK)
Imperial Holdings (IFT)
Ryland Group (RYL)
NorthStar Realty Finance (NRF)
Silver Bay Realty Trust (SBY)
SeaDrill Limited (SDRL)
Lancashire Holdings Limited (OTCPK:LCSHF)
RAIT Financial Trust (RAS)
Whiting USA Trust (WHX)
Texas Pacific Land Trust (TPL)
UFP Technologies (UFPT)
Keating Capital (KIPO)
Lakeland Industries (LAKE)
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.
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.
Additional disclosure: I have no positions, nor have I ever had an article chosen as an Alpha-Rich article.