In my initial article on SA, I outlined a methodology that might identify portfolios generating consistent alpha. This methodology relies on calculating risk metrics from stock returns, and then using iterative procedures to identify target portfolios.
Operationally, I update the data on a daily basis, and review the portfolio performance weekly. I maintain a core portfolio, which I call ANTS (my pseudonym), and a series of alternative portfolios (continuously updated) which exhibit improved alpha characteristics.
In the past week, I have looked for portfolios that have added alpha even during the dips and subsequent rallies of the past few weeks.
THE ANTS PORTFOLIO
The core ANTS portfolio was updated as of March 2 and consists of the following:
With an alpha trajectory of (click to enlarge images):
Generally, this portfolio has performed well. The alpha trajectory since January 26 is the expected trajectory, other than the dip apparent around February 16. I regard that dip as a weakness, and I use that to look for an alternative portfolio which might have a smoother alpha trajectory, with a similar slope.
The idea then is to track both portfolios to see which mix of stocks might have the better long term alpha generation capability.
I identified a number of portfolios that displayed positive alpha through the dips recorded in February. The following (equal weighted) portfolio displayed less downside risk than other alternatives.
The graph below compares this portfolio to the ANTS portfolio over the past two weeks. There is a possible divergence in alpha which, if confirmed in the next week, would suggest that the ANTS portfolio could be improved.
While this is a quantitative method, I remain of the opinion that the portfolio stocks should exhibit sound underlying businesses.
I have reviewed earnings for this alternative portfolio. Most appear sound. Stocks that beat Q4 estimates and have good earnings profiles are TDG, GPX, TBL, UNH, SXI, KCI. IBA met estimates while ESC and DTG missed. While ESC missed estimates, it appears to be a recovery situation.
Given the dips in the market over the past two weeks, the ANTS portfolio has performed satisfactorily. Nevertheless alpha should have been more consistent, and we have identified stocks which might improve future performance.
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