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Medium-term horizon, long/short equity, research analyst, portfolio strategy
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The editors of SA kindly suggested the title of “Evolving Portfolio” in relation to a previous article initiating this particular methodology. I had intended to make this a regular weekly article, but the market turmoil starting 1 August diverted my attention. I am initiating the process once more.

As outlined in my first article, my methodology identifies the best performing portfolio on a given date, and the alpha of the portfolio is very close to linear. However, this does not last and the portfolio subsequently tends to index returns.

What does happen is that a new portfolio can be formed which continues to outperform as shown in the following graphs. The bifurcation is quite pronounced. The newer portfolio may retain some of the stocks of the previous portfolio, but adds upward movers and drops laggards. The upward movers are usually near neighbours on my risk/reward metric, so there is consistency in the methodology.

[Click to enlarge]

The 26 August portfolio comprises the following:

RGR

Sturm Ruger

Defence

CSR

China Security

Business Support Services

AUY

Yamana Gold

Gold Mining

AEA

Advance America Cash

Consumer Finance

KNM

Konami Corp

Toys

BTH

Blyth Inc

Nondurable Household Products

ZNH

China Sthn Airlines

Airlines

NLC

Nalco Holdings

Waste & Disposal Services

BVN

Buenaventura Mining

Gold Mining

MLI

Mueller Industries

Industrial Machinery

KCI

Kinetic Concepts

Medical Equipment

SLW

Silver Wheaton

Platinum & Precious Metals

COG

Cabot O&G

O&G Exploration & Production

ABX

Barrick Gold Corp

Gold Mining

AN

AutoNation Inv

Specialty Retailers

My experience is that stocks at this end of the risk reward spectrum might have limited time for out performance, usually two to three weeks, hence our title. This is a high turnover strategy.

There is a “canary in the coal mine” quality about this analysis. If the market weakens, then these portfolios signal the event by weakening early. Evidence of this, which in my experience is a common characteristic, is evident in the 25 July portfolio above.

For reference, the 25 July portfolio was:

GCO

Genesco

Apparel Retailers

Buy Out

CNS

Cohen & Steers

Asset Managers

Dividends

AEA

Advance America

Consumer Finance

Stock Pick

EQT

EQT Corp

Gas Distribution

Sector Play

BBG

Bill Barrett Corp

O&G Exploration & Production

Sector/Small Cap

BRY

Berry Petroleum

O&G Exploration & Production

Stock Pick

COG

Cabot Oil & Gas

O&G Exploration & Production

List

CVI

CVR Energy

O&G Exploration & Production

List

WNR

Western Refining

O&G Exploration & Production

Sector/stock Pick

CPX

Complete Prod.

Oil Equipment & Services

List

HAL

Halliburton

Oil Equipment & Services

List

HLX

Helix Energy

Oil Equipment & Services

List

HP

Helmerich & Payne

Oil Equipment & Services

List

PDS

Precision Drilling

Oil Equipment & Services

Sector

DPZ

Domino's Pizza

Restaurants & Bars

Sector

AVD

American Vanguard

Specialty Chemicals

Sector

ABG

Asbury Automotive

Specialty Retailers

List

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

>>Click here for part 3>>

Source: Building An Evolving Portfolio (Part 2)