Barron's 400 Index logo

The Barron’s 400: GARP vs. Size – Week Ending October 9th

Facebook
Twitter
LinkedIn

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 9, 2020:

Index Stock Category One Week Price Return
Barron’s 400 (B400) GARP Stocks 5.28%
Russell 1K Large Cap Stocks 3.98%
Russell 2K Small Cap Stocks 6.38%
S&P 500 Large Cap Stocks 3.84%

Source: MarketGrader Research & FactSet.

Like the prior week, the broad market was once again up last week with both large cap stocks and small caps posting solid returns, with gains in small caps once again outpacing large cap gains. The Russell 1K gained 3.98% while the Russell 2K gained 6.38% for a significant size spread of 2.40% in favor of small caps for the week. The B400 index of GARP stocks posted a gain of 5.28%.

The combined performance of the size categories over the last two weeks seems to suggest that small caps are having a sort of a “mini” rally. Therefore, we thought it would be interesting to present to our readers the top performers in the B400.

B400’s Ten Best Performers Last Week Starting Weight in the S&P 500 Starting Weight in the B400 1-Week Price Performance Contribution to S&P 500 Performance Contribution to B400 Performance
Hibbett Sports Inc. 0.29% 24.2% 0.07%
Enphase Energy Inc. 0.31% 20.7% 0.06%
Quidel Corporation 0.36% 18.1% 0.07%
Federated Hermes Inc. 0.24% 16.4% 0.04%
Monolithic Pwr Sys 0.26% 15.8% 0.04%
Darling Ingredients Inc. 0.26% 15.0% 0.04%
Artisan Partners Asset Management Inc. 0.25% 14.2% 0.04%
Amkor Technology Inc. 0.24% 13.8% 0.03%
Western Alliance Bancorporation 0.24% 13.6% 0.03%
Renewable Energy Group Inc. 0.31% 13.6% 0.04%
Total 0 2.77%   0 0.46%

Source: MarketGrader Research.

Notice that none of last week’s top ten top performing companies in the B400 have an allocation in the S&P 500. So even though all of these companies posted double-digit gains for the week, they made no contribution to the performance of that index.

On the other hand, because the B400 is size agnostic it incorporates both large cap and small cap stocks in the index. Therefore, these quality companies passed the GARP-based selection and made it into the index when the B400 was reconstituted and rebalanced three weeks ago. At the rebalance, the B400 is equally weighted, so these ten companies would have started off with a total weight of 2.50% at the rebalance. But at the start off last week they had a combined weight of 2.77% in the index and contributed 46 basis points to the 5.28% in B400’s performance – or about 9% of the index’s price gain for the week. Clearly, the performance of the B400 is being driven by many more companies that that of the S&P 500.

As mentioned earlier, this is the third week that we are tracking the reconstituted B400. In terms of size attribution, once again like the prior week, the performance of the size categories last week is unable to fully account for the performance of the B400. A passive combination in large/small caps in the B400’s weights would have returned 4.89% which is the sum of 2.48% (the contribution made by large caps) and 2.41% (which is the contribution made by small caps). This means that the GARP based stock selection added an alpha of 39 basis points last week resulting in a total price increase for the B400 of 5.28%. Another 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 62.27% 2.48%
Small Cap Stocks 149 37.73% 2.41%
GARP Stock Selection 0.39%
Total 400 100% 5.28%

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: Similar to the prior week, both large caps and small cap stocks posted gains last week with small caps significantly outperforming large caps. Also, like the prior week, the B400’s GARP selection again added an alpha of 39 basis points last week. Here are the total weekly wins by size category and for GARP stocks.

Size & Selection Performance Total Number of Weeks Analyzed = 3
Large Cap Stocks Outperformed 1 week
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 September 21, 2020, when the B400 was reconstituted and rebalanced.

Cumulative Performance

The cumulative performance and attribution over the past three weeks is presented in the tables below. Since its reconstitution, with a cumulative performance of 6.70%, B400 is outperforming both the large cap index (5.14%) and the small cap index (6.56%). This outperformance is a consequence of the 1.03% of cumulative alpha that can be attributed to the GARP-based stock selection implemented by the B400 three weeks ago.

Index Stock Category Three-Week Price Performance: September 21th Through October 10th
Barron’s 400 (B400) GARP Stocks 6.70%
Russell 1K Large Cap Stocks 5.14%
Russell 2K Small Cap Stocks 6.56%

Source: MarketGrader Research & FactSet.

Sources of Return Number of Stocks in the B400 Total Weight in the B400 on September 21th Three-Week Price Performance Contribution: September 21th Through October 10th
Large Cap Stocks 251 62.75% 3.23%
Small Cap Stocks 149 37.25% 2.44%
GARP Stock Selection 1.03%
Total 400 100% 6.70%

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