The Barron’s 400: GARP vs. Size – Week Ending July 31st

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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 active managed portfolio.

The table below presents the one-week price performance of the US equity markets ending July 31, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks 1.47%
Russell 1K Large Cap Stocks 1.80%
Russell 2K Small Cap Stocks 0.88%
S&P 500 Large Cap Stocks 1.73%

Source: MarketGrader Research & FactSet.

This was an up week for US equities with large cap stocks, small cap stocks and the B400 posting positive returns. However, size bets paid off this week: large caps stocks outperformed small cap stocks with the Russell 1K beating the Russell 2K by 92 basis points. The B400 index of GARP stocks was up 1.45%.

As expected, because both the R1K and S&P 500 are market cap weighted indexes and therefore are heavily weighted in the largest stocks, a lion’s share of their performance can be explained by the performance of the largest 10 issues in the indexes.

At the start of the week, the largest 10 issues in the S&P 500 made up 31.08% of the index and contributed a total of 1.24% to the index, or more than 70% of the S&P’s 1.73% return for the week. Only 40 basis points of return was contributed by the remaining 490 stocks in the S&P 500.

For the B400 which starts of as an equally weighted index at its reconstitution, the same issues only made up 1.99% of the index at the start of the week. Consequently, these 10 largest issues only contributed 7 basis points, or about 4% of the B400’s 1.45% return for the week. Here, it might be worth noting that the market cap weighted version of the B400 index posted a return of 2.62% for the week beating both the Russell 1K and S&P 500 indexes handedly.

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. 5.62% 0.27% 14.73% 0.83% 0.04%
MSFT Microsoft Corporation 5.35% 0.25% 1.84% 0.10% 0.00%
AMZN Amazon.com, Inc. 5.15% 0.31% 5.18% 0.27% 0.02%
GOOG Alphabet Inc. Class C 3.57% -1.91% -0.07% 0.00%
GOOGL Alphabet Inc. Class A 3.56% 0.25% -1.34% -0.05% 0.00%
FB Facebook, Inc. Class A 2.28% 0.28% 9.95% 0.23% 0.03%
BRK.B Berkshire Hathaway Inc. Class B 1.56% 0.65% 0.01% 0.00%
V Visa Inc. Class A 1.41% 0.23% -2.43% -0.03% -0.01%
JNJ Johnson & Johnson 1.32% 0.20% -1.59% -0.02% 0.00%
WMT Walmart Inc. 1.25% 0.20% -1.40% -0.02% 0.00%
Total 31.08% 1.99% 1.24% 0.07%

Source: MarketGrader Research & FactSet.

Unlike the R1K and S&P 500 whose return can largely be attributed to the returns of a small number of the largest companies in the equity universe, the B400’s return is attributed to many more holding within the index. For instance, the top three performers in the B400 for the week, contributed 16 basis points to the index’s weekly performance.

Three 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
CNXM CNX Midstream Partners LP 0.19% 35.6% 0.07%
FIX Comfort Systems USA, Inc. 0.21% 21.0% 0.04%
CSGP Costar Group, Inc. 0.22% 20.7% 0.05%
Total 0.61% 0.16%

Source: MarketGrader Research & FactSet.

The top performer, CNX Midstream Partners LP (CNXM), a limited partnership operating in the energy sector announced second quarter earnings last week. And even though earnings of $0.35 per share were down 44.44% year over year, they were in line with the estimates. Therefore, the stock rallied.

Unlike the previous two weeks during which GARP stocks added significant alpha, 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 66.91% of the index. A simple attribution using the size indexes reveals that 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 marginally decreased the performance by three 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 66.91% 1.21%
Small Cap Stocks 130 33.09% 0.29%
GARP Stock Selection -0.03%
Total 400 100% 1.47%

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 clear winner this week. Selection based on GARP stocks posted a flat to negative return for the week.

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