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A New Universe

Dec. 28, 2020 9:29 AM ET
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WMA, LLC's Blog
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Value, Growth, yield, Portfolio Strategy

Seeking Alpha Analyst Since 2018

Williams Market Analytics, LLC is a quantitative research boutique offering insightful, actionable analysis of financial markets. The firm also runs systematic, absolute return allocation strategies using quantitative models and a fundamental company ranking methodology. Our strategists have a combined 60 years of market experience with one PhD in finance, two MBAs, and the CFA charter. As authors of WMA Investments and Monitors, a premium subscription service at Seeking Alpha, our objective is to bring investors timely investment ideas and decision-support tools to aid readers in building their own long-term portfolios. The service includes real-time access to several actively managed strategy portfolios, access to our Fundamental Allocation Model, and our quantitative Daily Trading Models. .

Summary

  • A new investment universe to better invest for the next decade.
  • A Global QES Strategy to seek long-term out-performance.
  • Marrying great fundamental and quantitative analysis.

As the Santa Claus Rally begins in the final week of 2020, we are re-tooling our investment methodology beginning with the universe of stocks that we want to analyze and invest in. Unlike the DGR Macro Trading Strategy, in which we actively trade indexes (via ETFs) based on our sense of the macro picture and our technical trading indicators, our Global Quantitative Equity Selection Strategy will be taking a more thoughtful, allocative approach. Note we added “Global” to the name, hinting at our long-term preference for investing in the next decade. What does this mean? This means we want to seek long-term capital appreciation and sit in dividend payers in the Global QES, all the while maintaining our hands-on approach to risk management. Our Daily Trading Model will still play a vital role, even if we plan to take a longer-term view. Nipping in the bud any position that begins to show technical deterioration, along with mediocre fundamentals, still makes good sense to us. One big change in our QES Strategy going forward is that we are not going to move into a big portfolio cash position, waiting for the once-every-year pull-back whose magnitude is impossible to gage. There is always a group of good stocks beginning a bull market somewhere in the world. We are now equipped to find these nascent bull markets and get on board for as long as the fundamentals plus technicals warrant.

Our New Cross-Section of Global Stocks

As alluded to above, we don’t believe that the U.S. market will outperform international stocks forever. In fact, we can bet the farm on this. Looking back at the past, the U.S/International stock relative price curve tends to move in long secular trends. For example, from 2000 to 2008, international stocks beat U.S. stocks (coming off the Tech Bubble). We may still be early in anticipating the next secular relative bull for international stocks, but our 15-20 year time horizon allows us to do this and ensure a winning long-term allocation.

So what is different in our new universe?

  • We entered stock tickers for non-U.S. exchanges, easily accessible via Interactive Brokers. These exchanges include Canada, Australia, Hong Kong, Singapore, Japan, and all the Western European exchanges, and two East European exchanges (Russia and Poland). If we want to invest in China’s growth, we now have access to all the real Chinese stocks via Hong Kong H-shares. We say real, because all the crappy new Chinese company listings on the Nasdaq were removed. These often prove to be problematic companies. Importantly, we want to have exposure to euros, Singapore dollars, Aussi dollars, etc, as a solid long-term diversified portfolio also means currency diversification. A final point here, while it will cost about USD 3.00 per trade on Hong Kong (European bourses are cheap at EUR 1.25/trade), the slightly higher trading cost does not dissuade us. First, the diversification gains and access to new stocks offsets this cost. Second, while most of these stocks are available via U.S. ADRs, the infrequent trading in the U.S. and mile-wide bid/ask spreads make using the U.S. share uneconomical.
  • All Limited Partnerships (LPs) were permanently removed. These companies generate K-1 filings and are not appropriate for retirement portfolios.
  • As the fundamental screening process is the first and most important step in our allocation process, we axed all companies with LESS THAN five analysts covering the stock. One analyst does not make a consensus earnings forecast. Two analysts only make an average forecast. Five is the perfect number. Without a consensus earnings forecast for next year, we have no forward P/E! And we also like to see earnings revisions, because this is the way analyst express negative or positive opinions. Recommendations are always on Buy for almost every company and mean nothing anymore.
  • As a consequence of the above point, we are moving away from small caps, which are a crap shoot for most investors (except insiders). No analyst coverage means no visibility. Our new universe is essentially all mid and large caps, which we want. We our investing our retirement savings, not going to Las Vegas.
  • We are dividing the universe by INDUSTRY GROUP and not sector. We now have 4562 individual company stocks. We will run our comparative fundamental analysis by GICS industry group to make a more “apples-to-apples” comparison. Thus, we’ll offer readers our Focus List of companies by industry group. We modified the GICS classification slightly to group the three Consumer Staples industry groups into one Staples group. There is no real difference in terms of macro drivers for stock price between Food & Staples Retailing, Food, Beverage & Tobacco, and Household & Personal Products. Thus our fundamental rankings will be made on:
    • Consumer Staples
    • Energy
    • Materials
    • Capital Goods
    • Commercial & Professional Services
    • Transportation
    • Automobiles & Components
    • Consumer Durables & Apparel
    • Consumer Services
    • Retailing
    • Health Care Equipment & Services
    • Pharmaceuticals, Biotechnology & Life Sciences
    • Banks
    • Diversified Financials
    • Insurance
    • Software & Services
    • Technology Hardware & Equipment
    • Semiconductors & Semiconductor Equipment
    • Telecommunication Services
    • Media & Entertainment
    • Utilities
    • Real Estate

We are confident that we’ll have more pertinent fundamental rankings.

Conclusion

In applying our technics to this superior universe of stocks, we are also going to ALSO filter out stocks via our weekly trend indicator. With 4562 stocks, we’ll have plenty of choice after the fundamental screening, so we’ll also screen out stocks that have a “negative 6” WMA weekly trend score (maximum absolute downtrend and maximum relative price downtrend). Buying stocks in major downtrends means bottom-fishing, a low probability investment strategy. Our shorten watch-list will then be analyzed via each company’s fundamental score, our read of the price chart, and our read of the macro environment. We’ll present more about our Global QES approach in coming updates and commentaries. We are “hooking up” everything in the fundamental and technical trading models this week, and will have our FULLY ALLOCATED portfolio to start 2021!

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