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 high quality, GARP stocks. It is not an actively managed portfolio.
The table below presents the one-week price performance of the US equity markets ending September 18, 2020:
| Index | Stock Category | One Week Price Return |
| Barron’s 400 (B400) | GARP Stocks | 0.65% |
| Russell 1K | Large Cap Stocks | -0.22% |
| Russell 2K | Small Cap Stocks | 2.64% |
| S&P 500 | Large Cap Stocks | -0.64% |
Source: MarketGrader Research & FactSet.
Last week large cap stocks were down for the third consecutive week, but small cap stocks broke the losing streak and posted substantial gains. The Russell 1K was down -0.22% but the Russell 2K was up 2.64% for a significant size spread of 2.42% in the favor of small caps for the week. The B400 index of GARP stocks posted a gain of 0.65%.
Last week also provided a good illustration of the risks associated with taking on huge size bets. The largest 10 issues in the S&P 500 which (by weight) make up nearly a third of the benchmark were largely responsible for the losses posted by the S&P 500. With seven of the 10 issues declining, they together contributed -1.06% to the performance of the S&P 500. And even though the remaining two-thirds (by weight) of the benchmark erased some of the losses from the largest 10 issues, they could not make up for the entire loss leading the S&P 500 to post a decline of -0.64%. For the B400 index, these largest 10 issues together contributed a loss of six basis points to its performance for the week.
| Ten Largest Issues 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. | 6.53% | 0.32% | -4.61% | -0.30% | -0.01% |
| AMZN | Amazon.com, Inc. | 5.26% | 0.31% | -5.18% | -0.27% | -0.02% |
| MSFT | Microsoft Corporation | 5.13% | 0.25% | -1.78% | -0.09% | 0.00% |
| GOOG | Alphabet Inc. Class C | 3.40% | – | -3.99% | -0.14% | 0.00% |
| GOOGL | Alphabet Inc. Class A | 3.38% | 0.24% | -4.27% | -0.14% | -0.01% |
| FB | Facebook, Inc. Class A | 2.50% | 0.32% | -5.28% | -0.13% | -0.02% |
| BRK.B | Berkshire Hathaway Inc. Class B | 1.68% | – | 0.13% | 0.00% | 0.00% |
| V | Visa Inc. Class A | 1.39% | 0.23% | 0.96% | 0.01% | 0.00% |
| WMT | Walmart Inc. | 1.27% | 0.21% | -1.03% | -0.01% | 0.00% |
| JNJ | Johnson & Johnson | 1.27% | 0.20% | 0.95% | 0.01% | 0.00% |
| Total | 31.82% | 2.08% | -1.06% | -0.06% |
It is also worth noting that because the Russell 1K takes on a smaller concentration risk due to holding nearly twice as many stocks as the S&P 500, it was able to mitigate more of the losses from these largest 10 issues. This explains the disparity in the -0.22% loss posted by the Russell 1K and the -0.64% loss posted by the S&P 500 even though both are considered large cap benchmarks.
This week also illustrates how the B400 evaluates its weekly performance using a stricter standard. Even though the B400 outperformed the S&P 500 and the broad market, the size attribution reveals that the GARP based stock selection was unable to add alpha last week. Using the Russell 1K and Russell 2K as proxies for the performance of large and small caps, the weekly size attribution implies that GARP based stock selection had a small but negative effect of seven 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 | 67.21% | -0.15% |
| Small Cap Stocks | 130 | 32.79% | 0.87% |
| GARP Stock Selection | -0.07% | ||
| Total | 400 | 100% | 0.65% |
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 have now posted losses for three consecutive weeks. On the other hand, small caps not only outperformed large caps last week, but posted substantial gains. In addition, even though the B400 posted a gain of 65 basis points for the week, the GARP selection was unable to add alpha. Here are the cumulative weekly wins by size category and for GARP stocks.
| Size & Selection Performance | Total Number of Weeks Analyzed = 10 |
| Large Cap Stocks Outperformed | 6 weeks |
| Small Cap Stocks Outperformed | 4 weeks |
| GARP Based Stock Selection Added Alpha | 4 weeks |
Note: The above table was first conceived for the week starting July 10, 2020.
On a final note, as per the index rules, the reconstituted and rebalanced B400 goes into effect this week. Therefore, starting next week we will start tracking the performance of the “new” B400. Since the table above is a summary of the weekly analysis, we thought it might be useful to give our readers an aggregated performance review of the entire 10-week period since we started this blog. The table below presents the cumulative price performance over this 10-week period.
| Index | Stock Category | 10 Weeks Performance: Starting July 10th Through September 18th |
| Barron’s 400 (B400) | GARP Stocks | 6.52% |
| Russell 1K | Large Cap Stocks | 4.52% |
| Russell 2K | Small Cap Stocks | 8.02% |
| S&P 500 | Large Cap tocks | 4.22% |
Source: MarketGrader Research & FactSet.
Small cap stocks outperformed large cap stocks over the 10-week period ending September 18th. The Russell 1K was up 4.52% and the Russell 2K was up 8.02% for a significant size spread of 3.50% in favor of small caps for the 10-week period. The B400 index of GARP stocks posted a gain of 6.52%.
Even though the performance of the B400 was in between the performance of the Russell 1K (large caps) and the Russell 2K (small caps), the performance attribution controlling for size reveals that the passive large/small mix would have generated a combined performance of 5.67%. Since the B400 was up 6.52% over this 10-week period, this means that the GARP based stock selection methodology employed by the B400 added an alpha of 85 points. This is a significant alpha over a 10-week period.
| Sources of Return | Number of Stocks in the B400 | Total Weight in the B400 on July 10th | 10 Week Contribution to B400 Return: Starting July 10th Through September 18th |
| Large Cap Stocks | 270 | 67.15% | 3.04% |
| Small Cap Stocks | 130 | 32.85% | 2.63% |
| GARP Stock Selection | 0.85% | ||
| Total | 400 | 100% | 6.52% |
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.
