We continue to explore the concept of using momentum strategies on solid stocks held by great investors or funds. In this article, we delve into the performance results on investing in solid value stocks held by the well-known Sequoia Fund (SEQUX). The Sequoia Fund is a long running value growth stock fund that employs Warren Buffett's stock investing principles. When Buffett dissolved his investment partnership in the 1960s, he referred this fund to his former clients.
The strategy involves forming a portfolio, P Sequoia Fund Top Stock Momentum, using the following top holdings from the Sequoia Fund as candidates for a momentum strategy:
| Valeant Pharmaceuticals... | VRX |
| The TJX Companies, Inc. | TJX |
| Fastenal Company | FAST |
| Advance Auto Parts, Inc. | AAP |
| IDEXX Laboratories, Inc. | IDXX |
| Mohawk Industries, Inc. | MHK |
| Precision Castparts... | PCP |
| O'Reilly Automotive Inc | ORLY |
| Mastercard Inc | MA |
| Google Inc | GOOG |
| Intl. Business Machines... | IBM |
| Target Corporation | TGT |
| Praxair, Inc. | PX |
| Wal-Mart Stores, Inc. | WMT |
| Perrigo Company | PRGO |
A MyPlanIQ momentum strategy is used to score the above stocks every month. The top five stocks are chosen for this month's portfolio. They are equal weighted. Notice whenever a chosen stock's momentum score is ranked below cash, its portion is replaced with cash.
The following shows its performance:
Performance (As of 05/17/2012)
Annualized Return
| Name | YTD** Return | 1Yr AR* | 3Yr AR* | 5Yr AR* | Since 12/31/2000 AR* |
| P Sequoia Fund Top Stock Momentum | 0% | 10% | 22% | 17% | 13.95% |
| VFINX (Vanguard (S&P 500) Index) | 6% | 2% | 16% | 0% | 2% |
| VBINX (Vanguard Balance (60% stocks/40% bonds) | 5% | 4% | 13% | 3% | 4.4% |
* AR: annualized return
Click to enlarge
The portfolio handily outperformed VFINX (or S&P 500 SPY) by a big margin. See P Sequoia Fund Top Stock Momentum for more performance details.
Currently, the top 5 momentum stocks are:
Holdings (As of 05/17/2012)
| Stocks | Percentage |
|---|---|
| ORLY (O'Reilly Automotive Inc) | 20.47% |
| TJX (TJX Companies) | 22.47% |
| MA (MasterCard Inc) | 20.18% |
| AAP (Advance Auto Parts) | 17.00% |
| VRX (Valeant Pharmac) | 19.87% |
The above back testing result illustrates that it is effective to use momentum strategy on a set of solid 'good' stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
