The Barron’s 400: GARP vs. Size – Week Ending August 7th

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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 7, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks 3.33%
Russell 1K Large Cap Stocks 2.40%
Russell 2K Small Cap Stocks 6.00%
S&P 500 Large Cap Stocks 2.45%

Source: MarketGrader Research & FactSet.

Similar to the prior week, this was also an up week for US equities with large cap stocks, small cap stocks, and the B400 ending the week in solidly positive territory. Compared to last week, however, large caps and small caps switched places. Small cap stocks outperformed large cap stocks, as measured by the Russell 2K beating the Russell 1K by 360 basis points. The B400 index of GARP stocks was up 3.33%.

At the start of the week, the largest 10 issues in the market cap weighted S&P 500 made up 30.55% of the index and contributed a total of 81 basis points, or about a third of the S&P’s 2.45% return for the week.

For the B400, which is equally weighted at its reconstitution, the same issues only made up 2.03% of the index at the start of the week. Consequently, these 10 largest issues only contributed 5 basis points, or less than 2% of the B400’s 3.33% return for the week.

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. 5.53% 0.30% 4.57% 0.25% 0.01%
MSFT Microsoft Corporation 5.18% 0.25% 3.64% 0.19% 0.01%
AMZN Amazon.com, Inc. 5.08% 0.32% 0.09% 0.00% 0.00%
GOOGL Alphabet Inc. Class A 3.49% 0.24% 0.70% 0.02% 0.00%
GOOG Alphabet Inc. Class C 3.49% 0.78% 0.03% 0.00%
FB Facebook, Inc. Class A 2.23% 0.31% 5.82% 0.13% 0.02%
BRK.B Berkshire Hathaway Inc. Class B 1.60% 7.00% 0.11% 0.00%
V Visa Inc. Class A 1.42% 0.22% 3.13% 0.04% 0.01%
JNJ Johnson & Johnson 1.29% 0.19% 1.95% 0.03% 0.00%
WMT Walmart Inc. 1.24% 0.20% 0.44% 0.01% 0.00%
Total 30.55% 2.03%   0.81% 0.05%

Source: MarketGrader Research & FactSet.

As an outcome of the B400’s equal weighted methodology, the top performers within the index are also the largest contributors to the index’s performance. The 10 companies with the highest price return for the week within the index comprised 2.89% of the index at the start of the week and contributed a total of 53 basis points to the B400’s 3.33% performance. Interestingly, only one of these is included in the S&P 500.

Ten Best Performers by Weekly Price Return in the B400 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
REGI Renewable Energy Group Inc 0.26% 26.36% 0.07%
VAR Varian Medical Sys 0.04% 0.23% 21.79% 0.01% 0.05%
ROCK Gibraltar Industries Inc. 0.25% 21.62% 0.05%
FOXF Fox Factory Holding Corporation 0.32% 20.93% 0.07%
ENPH Enphase Energy Inc 0.37% 20.68% 0.08%
GMED Globus Med Inc 0.22% 18.12% 0.04%
CW Curtiss-Wright Cp 0.19% 15.61% 0.03%
ATKR Atkore International Group Inc 0.24% 14.89% 0.04%
TKR The Timken Company 0.27% 13.47% 0.04%
SQ Square Inc 0.53% 13.38% 0.07%
Total 0.04% 2.89%   0.01% 0.53%

Source: MarketGrader Research & FactSet.

Due to the outsized return of small cap stocks this week, portfolios selecting GARP stocks failed to add alpha. The B400 which is size agnostic holds about 270 large cap stocks. At the start of the week, the total weight of those large cap stocks was 68.80% of the index. A simple attribution using the size indexes reveals that for this week the performance of the B400 could be fully explained by the performance of the underlying size indexes. B400’s selection based on GARP stocks decreased the performance by 26 basis points.

Sources of Return Number of Stocks in the B400 Total Starting Weight in the B400 Contribution to B400 Return
Large Cap Stocks 270 68.80% 1.60%
Small Cap Stocks 130 33.20% 1.99%
GARP Stock Selection -0.26%
Total 400 100% 3.33%

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 an outright winner this week. GARP based stock selection was unable to add alpha. For those keeping a tally, here is the cumulative summary of the weekly analysis:

Size & Selection Performance Total Number of Weeks Analyzed = 4
Large Cap Stocks Outperformed 2 weeks
Small Cap Stocks Outperformed 2 weeks
GARP Based Stock Selection Added Alpha 2 weeks

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

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