The Barron’s 400: GARP vs. Size – Week Ending August 14th

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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 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 actively managed portfolio.

The table below presents the one-week price performance of the US equity markets ending August 14, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks 1.03%
Russell 1K Large Cap Stocks 0.61%
Russell 2K Small Cap Stocks 0.55%
S&P 500 Large Cap Stocks 0.64%

Source: MarketGrader Research & FactSet.

This was another up week for US equities with large cap stocks, small cap stocks, and the B400 ending the week in positive territory. Large cap stocks outperformed small cap stocks with the Russell 1K outperforming the Russell 2K by six basis points. The B400 index of GARP stocks was up a significant 1.03%.

This past week there was more variability in company returns by market cap. This becomes evident from an analysis of the return contribution of the largest stocks to the price performance of the large cap S&P 400 index.

Ten Largest Companies by MC in the S&P 500 Name Starting Weight in S&P 500 Starting Weight in B400 1-Week Price Performance Contribution to S&P 500 Performance Contribution to B400 Performance
AAPL Apple Inc. 6.20% 0.31% 3.42% 0.21% 0.01%
MSFT Microsoft Corporation 5.31% 0.25% -1.68% -0.09% 0.00%
AMZN Amazon.com, Inc. 5.29% 0.31% -0.61% -0.03% 0.00%
GOOGL Alphabet Inc. Class A 3.32% 0.24% 0.42% 0.01% 0.00%
GOOG Alphabet Inc. Class C 3.30% 0.89% 0.03% 0.00%
FB Facebook, Inc. Class A 2.34% 0.32% -2.68% -0.06% -0.01%
BRK.B Berkshire Hathaway Inc. Class B 1.63% 0.71% 0.01% 0.00%
V Visa Inc. Class A 1.37% 0.22% 0.14% 0.00% 0.00%
JNJ Johnson & Johnson 1.29% 0.19% -0.24% 0.00% 0.00%
WMT Walmart Inc. 1.21% 0.19% 2.02% 0.02% 0.00%
Total 31.26% 2.02%   0.11% 0.00%

Source: MarketGrader Research & FactSet.

At the start of the week, the largest 10 issues in the market cap weighted S&P 500 made up 31.26% of the index and contributed a total of 11 basis points, or only about a sixth of the S&P’s 0.64% return for the week. Note that six of the 10 issues had a positive return for the week and the other four posted negative returns. It is also clear that the remaining (about 490) names in the S&P 500 were largely responsible for the performance of the index.

For the B400, which is equally weighted at its reconstitution, the largest 10 issues only made up 2.02% of the index at the start of the week; given the variability in the performance of these largest stocks, they had zero net impact on the performance of the index. The entire performance of the index can be attributed to the remaining 390 names in the B400.

However, the B400 beat both the large cap and small cap indexes convincingly. The B400 beat the Russell 1K by 44 basis points and the Russell 2K by 48 basis points. It also beat the S&P 500 by 39 basis point.

What was the source of this outperformance?

Clearly, the source of this excess performance was not the all cap exposure for the B400 since small caps underperformed large caps. Here, it is important to remember that the B400’s size exposure is incidental and purely an outcome of the bottom-up stock selection methodology based on company quality and GARP.

The answer of course is that in the past week quality and GARP stocks outperformed irrespective of size. Consequently the B400, which is a portfolio of quality and GARP stocks, generated excess performance relative to both size indexes. This GARP based stock selection was the source of the outperformance and generated 44 basis points of alpha in the past week.

Sources of Return Number of Stocks in the B400 Total Starting Weight in the B400 Contribution to B400 Return
Large Cap Stocks 270 66.37% 0.40%
Small Cap Stocks 130 33.63% 0.19%
GARP Stock Selection 0.44%
Total 400 100% 1.03%

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.

The performance of the market cap weighted version of the B400 also confirms that the past week was very much a win for quality and GARP stocks. The market cap weighted B400 posted a return of 0.80% outperforming the S&P 500 by 16 basis points.

Conclusion: In terms of size, large cap stocks were a marginal winner this week. However, quality and GARP based stock selection added significant alpha. For those keeping a tally, here is the cumulative summary of the weekly analysis:

Size & Selection Performance Total Number of Weeks Analyzed = 5
Large Cap Stocks Outperformed 3 weeks
Small Cap Stocks Outperformed 2 weeks
GARP Based Stock Selection Added Alpha 3 weeks

Note: The above table was first conceived for the week starting July 10, 2020.

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