Due to the increase in venture capitalist and private equity funding, firms are choosing to IPO later in the development of their business. As a result, investor in public equity markets are missing out on the chance to invest in promising companies that produce outsized returns relative to more mature companies. Most of the time, these younger firms are able to succeed disproportionately compared to their peers is that they are developing new technology or methods that either increase efficiency or create new markets.
The trading thesis is to invest in public companies that are developing promising technologies. To possibly multiply the return, trading algorithms will be used to buy and sell these promising equities based pricing inefficiencies detect in the market. However, the algorithms will only trade the equities identified as promising. This will effectively lower portfolio risk because only equities predicted to rise in price will be help. This fundamental analysis will be combined with a computational approach in order to try to avoid large losses and have outsized gains.
A promising technology with several notable public companies is 3D printing. This new technology has the promise to create an entire industry ranging from product development to organ creation. Companies like Stratasys, 3D Systems, Organovo, and Proto Labs are market leaders and have their equity floated on public markets.
These are the five equities, I choose to invest in based on this thesis:
I developed a automated trading algorithm that only buys stock if the price goes below 90% of the 7-day moving average. Trading SSYS is allocated 40% of cash, while the rest of the equities trade with 15% cash each. This strategy was back-tested from 1/1/2014 to 8/1/2014. It exceeded the benchmark index by more than a percent; however, this is more remarkable considering that all the equities listed have seen losses YTD expect for Proto Labs, which has returned 11% YTD. The full results of the trading algorithm can be seen at : www.quantopian.com/posts/moving-strategy...
The actual algorithm is not central to the strategy. The thesis is to hold promising technology companies. But these types of equities are usually more volatile than the index. In order to minimize risk, while maintaining a position in these promising companies, a simple algorithm was made. This type of approach can be used to generate excess returns when applied to public companies developing promising technologies.
Disclosure: The author is long SSYS, ONVO.