Seeking Alpha

More Wizardry For 2017 -- Magic Formula Large Cap Strategy Update, 2017 YTD

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Includes: AAPL, ABBV, AET, AMGN, ANTM, BIIB, CA, CPRI, CSCO, DISCA, DNB, ESRX, FOXA, GILD, GNTX, HLF, HRB, HUM, IWB, JAZZ, KLAC, MD, RHI, SNI, SWKS, TARO, TGNA, UTHR, VRSN, VVV, WCG
by: Ryan Telford
Ryan Telford
Long only, Deep Value, contrarian, portfolio strategy
Summary

Over time, the Magic Formula buy and hold investing strategy has outperformed.

The Large Cap variation of this strategy has edged past its benchmark in 2017.

More than 75% of the stocks in this strategy have made gains over the period.

(Source: Pixabay.com)

Over the past year I have been writing about Joel Greenblatt’s buy and hold investing strategy known as the Magic Formula. This strategy screens for value stocks that show signs of quality, or said another way, quality companies that are on sale. The value component is determined by a low EV/EBIT, and the quality component by a high return on capital. For a full analysis of this strategy and historical performance, please read here.

I cover both the large cap version of the strategy (largest 20% of the testing universe), and a mid/large cap version (largest 50% of the testing universe). These strategies have shown slightly varying performance and risk characteristics, as outlined in my article linked above.

The large cap version has done particularly well in 2017, as it did in Q1. Let’s take a look.

The Stocks

The table below lists the stocks that passed the screen on 01 Jan 2017, and their performance to date.

Ticker

Name

Price per Share 01 Jan 2017

Price per Share 19 Oct 2017

% Change YTD

Market Cap ($M)

Industry

1

GILD

Gilead Sciences Inc

70.77

81.95

15.79

94,668

Biotechnology

2

UTHR

United Therapeutics Corp

144.12

119.71

-16.94

6,119

Biotechnology

3

TARO

Taro Pharmaceutical Industries Ltd

105.34

108

2.53

4,502

Pharmaceuticals

4

HUM

Humana Inc.

201.51

243.9

21.04

30,421

Health Care Providers & Services

5

HRB

Block H&R Inc

22.48

25.66

14.14

4,862

Diversified Consumer Services

6

CA

CA Inc

31.3

33.94

8.43

13,126

Software

7

VVV

Valvoline Inc

21.53

24.15

12.19

4,408

Chemicals

8

DISCA

Discovery Communications Inc

27.66

20.19

-27.01

11,649

Media

9

TGNA

TEGNA Inc

13.71

12.79

-6.7

4,586

Media

10

SNI

Scripps Networks Interactive Inc

70.67

84.59

19.69

9,214

Media

11

CSCO

Cisco Systems Inc

29.32

34.02

16.02

151,825

Communications Equipment

12

AET

Aetna Inc.

123.32

158.25

28.33

43,515

Health Care Providers & Services

13

HLF

Herbalife Ltd

48.72

75.55

55.07

4,482

Personal Products

14

AAPL

Apple Inc

114.38

156.61

36.92

618,035

Computers & Peripherals

15

VRSN

Verisign Inc

76.49

108.91

42.38

7,995

Internet Software & Services

16

KORS

Michael Kors Holdings Ltd

42.78

49.2

15.01

7,059

Textiles, Apparel & Luxury Goods

17

BIIB

Biogen Inc

263.1

343

30.37

61,700

Biotechnology

18

AMGN

Amgen Inc

144.82

184.09

27.12

108,897

Biotechnology

19

RHI

Robert Half International Inc.

48.71

51.08

4.85

6,287

Professional Services

20

GNTX

Gentex Corp

19.43

19.5

0.38

5,641

Auto Components

21

JAZZ

Jazz Pharmaceuticals Plc

110

145

31.82

6,530

Pharmaceuticals

22

SWKS

Skyworks Solutions Inc

74.55

104.47

40.13

13,805

Semiconductors & Semiconductor Equipment

23

ANTM

Anthem Inc

142.96

193.77

35.54

37,868

Health Care Providers & Services

24

ABBV

AbbVie Inc

60.7

96.78

59.43

101,752

Biotechnology

25

FOXA

Twenty-First Century Fox Inc

28.06

27.55

-1.81

52,032

Media

26

KLAC

KLA-Tencor Corp

77.53

109.06

40.66

12,299

Semiconductors & Semiconductor Equipment

27

WCG

WellCare Health Plans Inc

138.42

178.44

28.91

6,072

Health Care Providers & Services

28

ESRX

Express Scripts Holding Co

69.41

58.9

-15.14

42,417

Health Care Providers & Services

29

MD

Mednax Inc

66.86

44.62

-33.26

6,238

Health Care Providers & Services

30

DNB

Dun & Bradstreet Corp (The)

120.8

118.57

-1.85

4,463

Professional Services

(Source: Portfolio123.com and Author Table)

As we found in Q1, 13 of the 30 stocks are pharma/healthcare or biotech. Industry concentration in any strategy is of course a double-edged sword. In our case, nearly all stocks in these industries reported gains, if not returns greater than 20%.

The Good

23 of the 30 stocks (76%) reported positive returns, and 13 gained more than 20% (8 of which were from our high industry concentration in pharma/health/biotech.

We also have 1/5 th of the FAANG cartel in our portfolio, none other than Apple (AAPL). A gain of nearly 37% has done this strategy well.

Two of our holdings broke the 50% gain threshold, Herbalife (NYSE:HLF) and Abbvie (NYSE:ABBV).

The Bad

Less than a quarter of the holdings have lost value to date, our biggest loser Mednax (MD) lost 33% of value, ironically also in our highly concentrated industries.

The Overall Performance

In a year that seems to be led by FAANG and indices, our strategy has managed to edge above its benchmark, the Russell 1000 TR (IWB). At a return of 15.96% over the year, it has edged past the R1000TR by roughly 75 basis points (15.2%). This outperformance has been at the cost of higher volatility however. The strategy experienced a maximum drawdown of 4.2%, compared to the benchmark’s 2.6%. I would not consider this significant. Standard deviation is nearly twice that of the benchmark (7.3% vs 4.3% respectively). This volatility is shown by the graph below.

(Source: Portfolio123.com data and Author graph)

I always like to compare the current performance of my quant strategies to the past performance. We are not yetat year end, however even at a 16% return we are roughly in line with the historical annual performance of the strategy (source).

Let us see how the remainder of 2017 treats our strategy.

The large and midcap version of this strategy (largest 50% of stocks in the universe) has performed considerably different in 2017. Stay tuned for a recap on this strategy.

Until then, happy investing.

For more on quantitative investing and strategies, be sure to follow me on SeekingAlpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am a user of Portfolio123.com, and have included affiliate links in the article. Should investors use my link to sign up for a paid membership of P123, I will receive a nominal commission from P123, with no additional fee to the new subscriber. Thank you in advance.