The Barron’s 400: GARP vs. Size – Week Ending August 21st

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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 21, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks -1.06%
Russell 1K Large Cap Stocks 0.83%
Russell 2K Small Cap Stocks -1.61%
S&P 500 Large Cap Stocks 0.72%

Source: MarketGrader Research & FactSet.

Large cap stocks scored a big win last week with the Russell 1K posting a price gain of 0.83% and the Russell 2K posting a price loss of -1.61% for a total size (large-small) spread of 2.44%. The B400 index of GARP stocks was down -1.06%.

Though the performance of the size indexes seems to suggest that it was a good week for all large cap stocks, a deep dive into the performance of the largest 10 issues by market cap tells a different story. For instance, the S&P 500, an index of large cap stocks, started of the week with a total weight of 30.80% in the largest 10 U.S. equity issues. The price performance of these 10 largest issues contributed a total return of 1.25% to the index. However, in the aggregate, the index only gained 0.72% for the week. This means that the remaining 490 or so stocks actually decreased the performance of the S&P 500 by 0.53% which is a dismal performance for the remaining securities in the 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. 6.14% 0.32% 8.23% 0.51% 0.03%
AMZN Amazon.com, Inc. 5.07% 0.30% 4.34% 0.22% 0.01%
MSFT Microsoft Corporation 5.05% 0.25% 1.97% 0.10% 0.00%
GOOGL Alphabet Inc. Class A 3.31% 0.23% 4.71% 0.16% 0.01%
GOOG Alphabet Inc. Class C 3.31% 4.82% 0.16% 0.00%
FB Facebook, Inc. Class A 2.40% 0.30% 2.21% 0.05% 0.01%
BRK.B Berkshire Hathaway Inc. Class B 1.67% -1.67% -0.03% 0.00%
V Visa Inc. Class A 1.38% 0.22% 3.81% 0.05% 0.01%
JNJ Johnson & Johnson 1.27% 0.19% 3.05% 0.04% 0.01%
WMT Walmart Inc. 1.21% 0.19% -0.73% -0.01% 0.00%
Total 30.80% 2.00%   1.25% 0.07%

Source: MarketGrader Research & FactSet.

This past week any portfolio that was not heavily exposed to the largest of the largest U.S. equity issues essentially underperformed the broad market. The performance of the market cap weighted B400 index verifies this observation: The market cap weighted B400 index which holds eight of the 10 largest issues listed above, was up 1.46% for the week, beating both the R1K and S&P 500 large cap indexes.

Since the broad market except for the mega cap names underperformed, it follows that any portfolio constructed using a stock selection methodology from the broad market also underperformed. For the B400, which employs a GARP based methodology for stock selection, the performance attribution using the size indexes suggests that the methodology contributed an alpha of -1.06%.

Sources of Return Number of Stocks in the B400 Total Starting Weight in the B400 Contribution to B400 Return
Large Cap Stocks 270 66.23% 0.55%
Small Cap Stocks 130 33.77% -0.54%
GARP Stock Selection -1.06%
Total 400 100% -1.06%

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, large cap stocks were a big winner last week with the entire performance of the large cap indexes being attributed to the performance of the mega cap stocks. Besides the mega cap stocks, the broad market including large caps underperformed. Consequently, quality and GARP based stock selection was unable to enhance portfolio returns. For those keeping a tally, here is the cumulative summary of the weekly analysis:

Size & Selection Performance Total Number of Weeks Analyzed = 6
Large Cap Stocks Outperformed 4 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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