The Barron’s 400: GARP vs. Size – Week Ending November 20th

Using the Barron’s 400 Index as a proxy for a portfolio holding GARP companies, the GARP vs. 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 November 20, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks 0.79%
Russell 1K Large Cap Stocks -0.23%
Russell 2K Small Cap Stocks 2.37%
S&P 500 Large Cap Stocks -0.77%

Source: MarketGrader Research & FactSet.

While the broad equity market was down last week, small caps continued to make significant gains. The Russell 1K index of large cap stocks posted a loss of -0.23% while the Russell 2K index of small cap stocks posted a gain of 2.37%, meaning small caps outperformed large caps by 2.60% last week. The B400 index of GARP stocks ended the week with a gain of 0.79%.

Last week was a good illustration of how the performance of the few largest companies essentially drives the performance of the broad market. For instance, the 10 largest issues in the S&P 500 which make up 31.10% of the index’s weight contributed a total of -57 basis points to the S&P 500’s -77 basis points loss for the week. This means that less than a third of the index (in terms of weight) contributed about three-fourths of the index’s performance. For the equally weighted B400, these same issues make up only 1.67% of the index’s weight and brought down the index’s performance by only three basis points.

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% 0.24% -1.61% -0.10% 0.00%
MSFT Microsoft Corporation 5.00% 0.24% -2.83% -0.14% -0.01%
AMZN Amazon.com, Inc. 4.80% 0.23% -0.94% -0.05% 0.00%
GOOG Alphabet Inc. Class C 3.62% -1.96% -0.07% 0.00%
GOOGL Alphabet Inc. Class A 3.61% 0.26% -2.02% -0.07% -0.01%
FB Facebook, Inc. Class A 2.40% 0.23% -2.62% -0.06% -0.01%
BRK.B Berkshire Hathaway Inc. Class B 1.63% -0.18% 0.00% 0.00%
V Visa Inc. Class A 1.38% -3.14% -0.04% 0.00%
WMT Walmart Inc. 1.28% 0.25% -0.20% 0.00% 0.00%
JNJ Johnson & Johnson 1.19% 0.23% -2.36% -0.03% -0.01%
31.10% 1.67%   -0.57% -0.03%

Source: MarketGrader Research & FactSet.

In terms of the size attribution for the B400, the 251 large cap stocks in the B400 had a combined weight of 61.84% in the index at the start of the week, while the remaining 149 small cap stocks had a combined weight of 38.16%. A portfolio allocated to the R1K and R2K in those weights would have posted a gain of 77 basis points for the week (a contribution of negative 14 basis points from the large cap allocation and positive 90 basis points from the small cap allocation). But the B400 posted a gain of 79 basis points, meaning the GARP based stock selection last week managed to eke out a positive alpha of two basis points.

Sources of Return Number of Stocks in the B400 Total Starting Weight in the B400 One Week Contribution to B400 Return
Large Cap Stocks 251 61.84% -0.14%
Small Cap Stocks 149 38.16% 0.90%
GARP Stock Selection 0.03%
Total 400 100% 0.79%

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: Large caps were down -0.23%, while small caps posted a handsome gain of 2.37%, outperforming large caps by 2.60% for the week. Small caps have now outperformed large caps in five of the last nine weeks. With the B400’s GARP selection eking out a gain last week, the GARP selection has also now added alpha in six of the past nine weeks.

Size & Selection Performance Total Number of Weeks Analyzed = 9
Large Cap Stocks Outperformed 4 weeks
Small Cap Stocks Outperformed 5 weeks
GARP Based Stock Selection Added Alpha 6 weeks

Note: The above table was first conceived for the week starting September 21, 2020, when the B400 was reconstituted and rebalanced.

Cumulative Performance

It has been nine weeks since the B400 was reconstituted and rebalanced. The cumulative performance and attribution over this nine-week period is presented in the tables below. Both large caps and small caps are in solidly positive territory with the R1K up 8.02% and the R2K up 16.17% implying a small cap premium of 8.15% over the period. With a cumulative price gain of 11.44%, the performance of the GARP-focused B400 is about in the middle of the size indexes.

Index Stock Category Nine-Week Price Performance: September 21th Through November 20th
Barron’s 400 (B400) GARP Stocks 11.44%
Russell 1K Large Cap Stocks 8.02%
Russell 2K Small Cap Stocks 16.17%

Source: MarketGrader Research & FactSet.

The cumulative performance attribution by size reveals that in addition to the 5.03% and 6.02% contribution of large caps and small caps respectively, 0.38% of the B400’s return can be attributed to the GARP-based stock selection implemented by the B400 nine weeks ago. That is a little more than 3% (0.38% of 11.44%) of the B400’s cumulative price performance over this period.

Sources of Return Number of Stocks in the B400 Total Weight in the B400 on September 21th Nine-Week Price Performance Contribution: September 21th Through November 20th
Large Cap Stocks 251 62.75% 5.03%
Small Cap Stocks 149 37.25% 6.02%
GARP Stock Selection 0.38%
Total 400 100% 11.44%

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.

Similar Articles