The Barron’s 400: GARP vs. Size – Week Ending July 24th

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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 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 24, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks 0.75%
Russell 1K Large Cap Stocks -0.29%
Russell 2K Small Cap Stocks -0.39%
S&P 500 Large Cap Stocks -0.28%

Source: MarketGrader Research & FactSet.

Large cap stocks marginally outperformed small cap stocks this week with the Russell 1K outperforming the Russell 2K by 10 basis points. But overall the market was in the red with the Russell 1K posting a return of -0.29% and the Russell 2K positing a return of -0.39%. The B400, an index of GARP stocks, was up 0.75%.

Both the R1K and S&P 500 are market cap weighted indexes and therefore are heavily weighted in the largest stocks. As it turns out, this week the entire price performance of the S&P 500 could be attributed to the price performance of the largest 10 issues in the index. As of the start of the week, the largest 10 issues in the S&P 500 made up 31.06% of the index and contributed a total of -0.30% to the index. [Recall, the S&P posted a return of -0.28%.] For the B400 which starts of as an equally weighted index at its reconstitution, the same issues only made up 2.03% of the index at the start of the week. Consequently, the negative drag on the B400 was only -0.03%.

Ten Largest Tickers by Market Cap 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. 5.74% 0.28% -3.85% -0.22% -0.01%
MSFT Microsoft Corporation 5.34% 0.26% -0.78% -0.04% 0.00%
AMZN Amazon.com, Inc. 5.08% 0.30% 1.58% 0.08% 0.00%
GOOGL Alphabet Inc. Class A 3.51% 0.25% -0.57% -0.02% 0.00%
GOOG Alphabet Inc. Class C 3.50% -0.24% -0.01% 0.00%
FB Facebook, Inc. Class A 2.32% 0.30% -4.68% -0.11% -0.01%
BRK.B Berkshire Hathaway Inc. Class B 1.57% 1.97% 0.03% 0.00%
V Visa Inc. Class A 1.42% 0.23% 0.03% 0.00% 0.00%
JNJ Johnson & Johnson 1.32% 0.20% -0.82% -0.01% 0.00%
WMT Walmart Inc. 1.27% 0.20% -0.38% 0.00% 0.00%
Total 31.06% 2.03%   -0.30% -0.03%
Like last week, this week GARP stocks also added significant 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 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 Starting Weight in the B400 Contribution to B400 Return
Large Cap Stocks 270 67.03% -0.19%
Small Cap Stocks 130 32.97% -0.13%
GARP Stock Selection 1.07%
Total 400 100% 0.75%

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 marginal winner this week. GARP stocks 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 24, 2020
GARP Stocks 2
Large Cap Stocks 1
Small Cap Stocks 1

Note: The above table was first conceived for the week starting August 10, 2020 for a total of two weeks since its inception.

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