Using the Barron’s 400 Index as a proxy for a portfolio holding GARP companies, the GARP Versus Size blog is a weekly summary of the performance of US equity markets aimed at informing readers of the alpha that is attainable using a GARP focused stock picking strategy. Readers might want to take note that the Barron’s 400 uses a rules-based, transparent and objective methodology for selecting GARP stocks. It is not an active managed portfolio.
The table below presents the one-week price performance of the US equity markets ending August 17, 2020:
|Index||Stock Category||One Week Price Return|
|Barron’s 400 (B400)||GARP Stocks||3.12%|
|Russell 1K||Large Cap Stocks||1.22%|
|Russell 2K||Small Cap Stocks||3.74%|
|S&P 500||Large Cap Stocks||1.30%|
Source: MarketGrader Research & FactSet.
Small cap stocks dominated this week with the Russell 2K outperforming the Russell 1K by 2.52%. Except for Apple (APPL) which posted a price gain of 0.42% for the week, the remaining five of the largest six issues by market cap in the Russell 1K and S&P 500 (MSFT, AMZN, GOOGL, GOOG, FB) posted negative gains thereby dragging down the large cap indexes.
However, this week GARP stocks also added significant alpha. The B400 which is size agnostic holds about 270 large cap stocks. But because it is equally weighted the total weight of those large cap stocks is only 67.15% of the index. A simple attribution using the size indexes reveals that this week stocks based on their GARP attribute added an alpha of 1.07%.
|Sources of Return||Number of Stocks in the B400||Total Weight in the B400||Contribution to B400 Return|
|Large Cap Stocks||270||67.15%||0.82%|
|Small Cap Stocks||130||32.85%||1.23%|
|GARP Stock Selection||1.07%|
Source: MarketGrader Research. The contribution for large cap stocks is calculated as the total weight in large Cap stocks times the return of the Russell 1K. The contribution for small cap stocks is calculated similarly. The total price return of the B400 that is not accounted for by the size contributions is attributed to stock selection using GARP, namely, the methodology employed by the B400.
Conclusion: In terms of size, small cap stocks were a clear winner this week. GARP stocks also outperformed significantly adding alpha to any portfolio with exposure to the GARP factor. For those keeping a tally, here are the cumulative weekly wins by stock category:
|Stock Category||Cumulative Weekly Wins Ending August 17, 2020|
|Large Cap Stocks||0|
|Small Cap Stocks||1|
Note: The above table was first conceived for the week starting August 10, 2020 for a total of 1 week since its inception.