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The Barron’s 400: GARP vs. Size – Week Ending October 16th

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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 October 16, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks 0.34%
Russell 1K Large Cap Stocks 0.21%
Russell 2K Small Cap Stocks -0.23%
S&P 500 Large Cap Stocks 0.19%

Source: MarketGrader Research & FactSet.

Last week the broad market was relatively flat, with large caps eking out a small gain and small caps eking out a small loss. The Russell 1K was up 0.21% while the Russell 2K was down -0.23% for a significant size spread of 44 basis points in favor of large caps for the week. The B400 index of GARP stocks posted a gain of 0.34%.

The 251 large caps stocks in the B400 had a combined weight of 62.23% in the index at the start of the week, while the remaining 149 small cap stocks had a combined weight of 37.77%. A portfolio allocated in the R1K and R2K in those weights would have had a positive contribution of 13 basis points from the large cap allocation and a negative contribution of nine basis points from the small cap allocation, for a positive return of only 4 basis points. But the B400 was up 34 basis points, meaning the GARP based stocks selection once again contributed a positive alpha of 30 basis points. Another very good week for GARP stocks.

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 62.23% 0.13%
Small Cap Stocks 149 37.77% -0.09%
GARP Stock Selection 0.30%
Total 400 100% 0.34%

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 eked out a small gain and small caps eked out a small loss with large caps outperforming small caps by 44 basis points for the week. Meanwhile, the B400’s GARP selection again added a positive alpha of 30 basis points for the week. Here are the total weekly wins by size category and for GARP stocks.

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 3 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 four weeks now that the B400 was reconstituted and rebalanced. The cumulative performance and attribution over the past four weeks is presented in the tables below. Over this time period, small caps have outperformed large caps. The R2K gained 6.31% and the R1K gained 5.36% implying a small-cap premium of 95 basis points over the past four weeks. With a total price performance of 7.06%, the B400 is outperforming both the size indexes. The cumulative performance contribution over this four-week period reveals that this outperformance is a consequence of the 1.35% of positive alpha that can be attributed to the GARP-based stock selection implemented by the B400 four weeks ago.

Index Stock Category Four-Week Price Performance: September 21th Through October 16th
Barron’s 400 (B400) GARP Stocks 7.06%
Russell 1K Large Cap Stocks 5.36%
Russell 2K Small Cap Stocks 6.31%

Source: MarketGrader Research & FactSet.

Sources of Return Number of Stocks in the B400 Total Weight in the B400 on September 21th Four-Week Price Performance Contribution: September 21th Through October 16th
Large Cap Stocks 251 62.75% 3.36%
Small Cap Stocks 149 37.25% 2.35%
GARP Stock Selection 1.35%
Total 400 100% 7.06%

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.

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