Seeking Alpha
Medium-term horizon, long/short equity, research analyst, portfolio strategy
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PORTFOLIO DEVELOPMENT

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.

AN ALTERNATIVE

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.

ADDITIONAL CONSIDERATION

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.

CONCLUSION

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.

Disclaimer: The content in this document is provided as general information only and should not be taken as investment advice. The contents in this explanatory paper shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author. The author may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility.

Source: Choosing Stocks for Consistent Alpha