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This is my first update to review the January performance of the Greenfield Optimized Sharpe Ratio Portfolio. For those of you new to this, I'm running a portfolio that started with $100,000 and will forward test whether the portfolio outperforms a simple buy-and-hold of dividend paying ETFs (providing broad diversification). The overall objective is to produce alpha in stock ownership but also have a regular income stream of dividend payments that currently are being deposited as cash into the account.
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Background
The following is a cut/paste of my description from my 1/1 blog entry:
Since September I've been working on the development and testing of a lower-activity/interaction portfolio. I simply do not have the time to run Connor's scans, enter trades, watch them day over day, and rinse/repeat. I travel often, and the different time zones kill my ability to manage my accounts on a daily basis.
Yes, exposure (risk) goes up when you are fully invested. I acknowledge this. Volatility is a manifestation of visible risk so optimizing on risk (volatility) is one way not have a high ulcer index.
Here are the basic tenants of this Optimized Greenfield Sharp Ratio Portfolio, and all must be true at the time of purchase:
- positive year-over-year (YoY) increase in revenues
- positive quarter-over-1-year-ago-quarter (QoQ) increase in revenues
- positive trailing-twelve-months (TTM) growth in revenues
- positive revenues for the current quarter
- positive year-over-year (YoY) increase in EPS
- positive quarter-over-1-year-ago-quarter (QoQ) increase in EPS
- positive trailing-twelve-months (TTM) growth in EPS
- positive EPS for the current quarter
For those of you who have been following me for years, you should recognize this criteria as the basis of the Greenfield screen. This criteria will (generally) keep you out of hot water, as it rejects companies who have falling revenues and are buying back their shares to increase EPS. Rising revenues AND EPS, when brought together, cut the universe of quality companies down to about 300-400 in any one screen.
But wait! There's more. A few technical requirements must exist:
- The close is above the 50d MA (price)
- The 50d MA is above the 150d MA
- The 150d MA is above the 200d MA
- The 200d MA has a positive slope upward for at least the past 10 consecutive trading days
- The average volume of the stock must be at least 150,000 shares on a 10-day average and 3-month average basis
Again, the above is taken as a refinement of my Greenfield screen. These technicals, in combination with the revenue and EPS criteria, further reduce the scan list to 100-150 stocks at any given time. This is quite manageable.
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Status
As of 2/4/2018, the portfolio holds the following stocks and associated shares:
ABBV 43
AMTD 23
BHP 82
CFG 18
CFR 23
CM 20
COR 4
CWT 11
DNKN 17
DRI 28
EMR 33
GLW 48
GRMN 16
HLI 18
KAR 45
MC 4
MDC 33
MGA 19
MNR 83
MSFT 25
PAYX 84
RCL 27
VZ 39
WBS 69
WRK 68
XLK 569
The account presently has a cost basis of $89,553.12 and the balance is in cash. Total account value (realized and unrealized) is $102,728.89. $157.25 in short-term capital gains were captured in January, as was $47.88 in dividend payments.
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January Transactions
The following snapshot shows which stocks were sold in January. Each was sold due to a disappointing earnings and/or revenues report:
Click on the image to enlarge.
Although some purchases are still pending, the following two positions were added to the portfolio this past week and used the proceeds of the previous sales:
Dividends
The following dividends were received in January:
JPM: $0.56/share, 54 shares, $30.24
DRI: $0.63/share, 28 shares, $17.64
Expected February Dividend Payments
ABBV will pay $0.71/sh to the account on 2/15 as we were a holder on 1/12
BHP will pay $0.22/sh on 2/15 as we were a holder on 2/1
PAYX will pay $0.50/sh on 2/15 as we were a holder on 2/1
Possible February Dividend Payments
AMTD will pay $0.21/sh on 2/20 if we are holding on 2/6
CWT will pay $0.188/sh on 2/23 if we are holding on 2/12
MDC will pay $0.30/sh on 2/21 if we are holding on 2/7
WBS will pay $0.26/sh on 2/27 if we are holding on 2/13
Possible March Dividend Payments
CFR will pay $0.57/sh on 3/15 for record holders on 2/28
GRMN will pay $0.51/sh on 3/30 for record holders on 3/15
HLI will pay $0.20/sh on 3/15 for record holders on 3/2
MNR will pay $0.17/sh on 3/15 for record holders on 2/15
MSFT will pay $0.42/sh on 3/8 for record holders on 2/15
Pending Transactions
GLW and MSFT are slated for sale. Both reported decelerating EPS numbers in the most recent earnings reports, which is criteria for sale. We are presently up 6% (+$133.75) in the MSFT position and this will dominate any dividend income that we could receive if we hold through the record date on 2/15. We hold 25 shares, and at $0.42/share this is only $10.50. I presently have a STOP LOSS order to sell 25 shares of MSFT at $90.72 and if MSFT reverses and moves higher, the order will move up accordingly (manually adjusted by me each evening).
BLK, BK, LVS, and IP are slated for purchase. Dividend yields are 2.04%, 1.67%, 3.84%, and 3.08% respectively.
Earnings and Dividends of Pending Transactions
- BLK will pay $2.88/sh, up from $2.50/sh, on 3/22 for holders on 3/7.
- To capture BK we had to be holders on 1/30 and we were not. It paid $0.24/sh to record holders.
- LVS will pay $0.75/sh, up from $0.73/sh, on 3/30 for holders on 3/22.
- IP will pay $0.475/sh on 3/15 to record holders of 2/21.
- BLK reports earnings on 4/13 BTO
- BK on 4/19 BTO
- LVS on 4/25 ATC
- IP just reported ER and was favorable.
Optimized Portfolio Configuration:
If you were to jump in to this portfolio on Monday, here is the intended construction, percentages, stop loss for entry, and number of shares, given a basis of $100K:
Given recent volatility and performance of these stocks, the following are target returns and volatility, with target Sharpe Ratios:
I note that this is down significantly from our original target at the beginning of January but those of you who follow this line of thinking know that we project the forward path using recent history. Recent history is DOWN, hence forward estimates will be lower.
I also note that even with the new additions of BLK, BK, IP, and LVS, the Sharpe Ratio doesn't improve all that much.
Comparison to Benchmarks
This is where the rubber hits the road.
Three portfolio configurations are presented:
- Portfolio 1: An income portfolio constructed with 40% VTSMX, 20% VGTSX, 10% VGSIX, and 30% VBMFX.
- Portfolio 2: The actual stock targets and their optimized SR percentages at the start of this effort, as of January 2nd.
- Portfolio 3: The forward-looking stock targets and their optimized SR percentages, as listed above.
- A benchmark, which is the Vanguard 500 Index investor fund (VFINX), is also presented.
Here are the January performance numbers:
At no time during the month did any of the positions lose money relative to the initial investment, hence Stdev and Max. Drawdown are not applicable. The Vanguard 500 index Investor (VFINX) mutual fund beat the income portfolio (Portfolio 1) in performance as well as our initial portfolio from January 2nd (Portfolio 2). Had we owned the mixture of Portfolio 3, it would have beat all the other portfolios, but of course, this statement doesn't count because the new portfolio was constructed with perfect knowledge of past performance.
Here are income comparisons for the period Jan 1 - Jan 31st, 2018:
It is worth noting that the software used for this does not look at the actual income streams but uses the annualized yearly yield and then backs out average monthly flows. We only captured $47 in dividends in our first month while the software is suggesting the number should have been closer to $110. The point of this graph is as follows:
- A relatively "safe" investment in income-focused mutual funds underperforms income targets relative to stocks. The stocks we are invested in are all Dividend Challengers-Contenders-Champions, so on an income-comparison level, the same amount of money is producing a considerable amount of dividend income relative to established mutual funds.
- The forward-looking composition of the portfolio (yellow) produced more in income than the actual purchased portfolio on January 2nd (red). Whether this project vs. capture continues will need to be tracked as the portfolio process matures.
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Conclusions
I'm cautiously optimistic after month one. Of course, this was an abnormal month due to market conditions, but overall, the mechanics of the portfolio seem to work and now, with the markets pulling back, we'll have some visibility into how markets perform in a down period.
It is clear to me that this approach of projecting a forward-looking optimized portfolio using past historical data has some merit, but I also see that it may underperform the benchmarks. One month does not give us the visibility we need, so I'll continue to do this work. I'll only stop the portfolio if it looks like the wheels are going to come off the wagon and I'm going to seriously lose money (I'm nowhere near that point yet).
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As with all my ramblings, you are responsible for your own investment decisions and I am not. Please do your own diligence, and please take ownership for your actions.
Regards,
pgd
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