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GARP Strategy Month 5 – 12% Total Return

  • Our 5th month running the Growth At A Reasonable Price Strategy sees a 12.3% net return and is already bouncing back.
  • Our GARP strategy saw returns of 20% at the end of January but has since narrowed with the prevailing volatility in the market.
  • The strategy has returned a 7% outperformance of its S&P 500 benchmark.

In the summer of last year, we published How To Return 29% A Year From This Successful GARP Strategy. The article demonstrated a data-driven trading strategy which identified dividend-paying companies that exhibited strong recent growth in their financials and were reasonably priced when compared to their book value and free cash flows.

You can see the live version of the strategy by clicking here the latest results have seen the GARP track down along with the overall market in February and yet is still showing a 12.3% return:

From 1-Sep

Model

S&P 500

Total Return (4 months)

12.3%

5.02%

Max Drawdown

9.0%

10.2%

Dividend Yield

0.2%

 

Win Rate (Closed)

61.3%

 

Profit Factor

2.31

 

Beta

1.00

 

Changes to Our Portfolio

We bought the following positions on 2nd January:

Commercial Metals – $2.75bn market cap

CMC manufactures, recycles and markets steel and metal products. It recently announced it would acquire certain US Rebar Assets From Gerdau for $600m. The acquisition is expected to be accretive to earnings and cash flow within the first year. CMC will have approximately 7.2m tons of global melt capacity at the close of the transaction and combined operations are expected to generate approximately $40m in pre-tax operational synergies annually.

CMC Analysis & News – Commercial Metals Company

BRIEF-Commercial Metals Company To Acquire Certain U.S. Rebar Assets F

Financial Engines – $1.77bn market cap

FNGN is a provider of independent, technology-enabled financial advisory services, discretionary portfolio management, personalized investment advice, financial and retirement income planning, and financial education. Its Q3 earnings report saw revenue up 9% to $122.2m and it estimates its 2018 revenue growth may be in the range of 5-8%​. Its AUM saw double-digit growth to 19% year-over-year to $160.2 billion as of September 30, 2017​. In this article, Terrier Investing says FNGN has an interesting market position and threats of “robo-advisors” are less severe than investors believe.

FNGN Analysis & News – Financial Engines, Inc.

Financial Engines: Expensive, But Strategically Well Positioned

Tillys – $427.1m market cap

TLYS is a destination speciality retailer of casual apparel, footwear and accessories for young men, young women, and children. Q4 2017 witnessed Divisar Capital Management taking a 6.51 percent passive stake in the company and L&F capital Management writes (in January) how a sector once left for dead by investors is soaring. The stock is up 60% over the past several months and they believe strong fourth quarter numbers could propel this stock meaningfully higher.

TLYS Analysis & News – Tillys, Inc.

Tilly’s: Soaring Alongside Other Teen Retailers

Criteo S.A. – $1.49bn market cap

CRTO is a France-based company specializing in digital performance marketing. Its personalized retargeting solutions work with Internet retailers to serve personalized online display advertisements to consumers who have previously visited the advertiser’s website. CRTO grabbed attention from the analysts recently, with analysts expecting its past five-year growth rates of  57.60% continuing for the next five years (a 9.58% annual growth rate).

CRTO Analysis & News – Criteo S.A.

Criteo: Oversold And Undervalued

 Toll Brothers – $7.19bn market cap

TOL is engaged in designing, building, marketing, selling and arranging financing for detached and attached homes in luxury residential communities. The Company operates through two segments: Traditional Home Building and Toll Brothers City Living (City Living). Spring Mill Research believes the time is right for Toll and has added the stock. In this article, he outlines the company’s most essential financial characteristics and explains why he values the stock for at least a 25% return.

TOL Analysis & News – Toll Borthers Inc

It’s Time For Toll Brothers

Kulicke & Soffa Industries – $1.61bn market cap

KLIC designs, manufactures and sells capital equipment and expendable tools, as well as services, maintains, repairs and upgrades equipment, all used to assemble semiconductor devices. The company has seen another solid quarter, beating revenue and EPS estimates again. This article from Faloh Investments points to the new incoming CEO as a clear indicator of an impending acquisition or speculation that KLIC will be merged with another company or taken private within the next few years. 

KLIC Analysis & News – Kulicke and Soffa Industries, Inc

Solid Beat And Raise From Kulicke And Soffa, Turnaround In Progress

Kulicke & Soffa: Is CEO Fusen Chen Prepping Another Acquisition Or Merger?

DAQO New Energy – $550.14m market cap

DQ is a low-cost polysilicon manufacturer., producing polysilicon and wafer for the manufacturing of solar panels. The company has just appointed a new CEO and according to this article by Iyad Atuan, the company offered a 130% upside from its September levels, which it hit and then plunged following the announcement of tariffs on U.S. solar panel imports. 

DQ Analysis & News – DAQO New Energy Corp.

Daqo founder steps down as acting CEO

Daqo New Energy: The Lowest-Cost Producers Will Survive

The strategy sold seven positions to make way for the newcomers:

Company

Entry

Exit

P/L

Deckers Outdoor (DECK)

2-Nov

2-Feb

35.3%

FTI Consulting (FCN)

2-Nov

2-Feb

-0.2%

Brooks Automation (BRKS)

4-Dec

2-Feb

18.0%

CITI Trends (CTRN)

4-Dec

2-Feb

-12.8%

Amdoc (DOX)

4-Dec

2-Feb

2.1%

Schitzer STL  (SCHN)

4-Dec

2-Feb

13.0%

Jacobs Eng (JEC)

1-Jan

2-Feb

0.5%

Current Positions

As of 8th February 2018, the strategy held the following positions:

Company

Days Held

Profit

Micron Technology (MU)

29

-3.3%

Kulicke & Soffa (KLIC)

5

-4.5%

DAQO New Energy (DQ)

5

-5.4%

Toll Brothers Inc (TOL)

5

-6.3%

Commercial Metals (CMC)

5

-4.0%

Financial Engines (FNGN)

5

-3.1%

Criteo (CRTO)

5

-2.2%

Tillys Inc (TLYS)

5

-6.7%

Ellis Perry (PERY)

47

6.5%

Barnes & Nobel (BNED)

27

-21.6%

Positions brought forward:

Perry Ellis – $393m market cap

Perry Ellis (PERY) designs distributes and licences quality men’s and women’s sportswear apparel, accessories and fragrances. Key brands such as Ben Hogan, Calloway and Penguin haven’t been enough to stop the company suffering from the same headwinds as the rest of the retail industry, and our strategy has selected this company based on its very low Price to Book and Free Cash Flow ratios. PERY has spiked in the last few days due to acquisition rumours.

Barnes & Noble Education – $364m market cap

BNED operates on-campus bookstores for educational institutions and sells and rents textbooks to students. As highlighted in this excellent article by Massif Capital, the company has started to see the benefits of it recent acquisition of MBS Textbook Exchange and the shares have been trending upwards since its most recent quarterly filing in October.

Micron Technology – $53bn market cap

Micron Technology (MU) is a market leader in memory solutions whose share price almost doubled in 2017. Matt Funaro has recently published a great article examining the bear case for MU and concluding that the company is a high-quality investment with room to grow in 2018. Andres Cardenal agreed here and has published a great graph comparing Micron’s price ratios to its industry peers.

How the Strategy Works

The strategy was built and tested using the InvestorsEdge.net platform – you can find more risk and strategy performance information on the model, together with the actual strategy definition details, by clicking here.

As a quick summary, each month we rebalance our portfolio using the following rules – we begin by defining a universe of stocks that have:

  • Market capitalizations greater than $150m and share price greater than $2.
  • A PEG ratio less than 0.9.
  • An average EPS growth rate greater than 10% for the past 8 quarters.
  • Net Current Asset Value of greater than $-750m.
  • Gross Income greater than Gross Income from the last quarter.

On 1st January (our last rebalance point), this would have returned 76 stocks, which we then rank using the following factors:

  • PEG ratio
  • Trailing Yield
  • Price to Book Value
  • Price to Free Cash Flow

We then buy the top 10 stocks in our ranked universe of securities, dropping existing positions unless they continue to rank in the top 10.

Our original backtests displayed compounded average returns of 29% a year since 2000 with remarkably low volatility for a strategy that invests primarily in small cap companies.

The Risks

A key risk that we always examine with mechanical investing strategies is that the data phenomenon that we are exploiting will simply stop working. To combat this, we look to see if a strategy intuitively makes sense – our model invests in companies with high historical and estimated EPS growth, high yields and assets and that are cheap relative to their book value and free cash flows, and that are showing improving gross income figures. To us, these are all logical and understandable factors as to why our system works and should continue to be profitable.

The average company our strategy invests in has a market capitalization of $250m-$2.5bn, leading to potential problems exiting positions at the lower end of our range in a market downturn. Risk appetite is an individual thing – for us the enhanced returns that come from focusing on smaller companies more than compensate the liquidity risk we take on. If this is a concern, operating the strategy with a higher market cap threshold would have resulted in smaller but still substantial historical profits.

Your Takeaway

Our Growth at a Reasonable Price strategy has held up as US stocks headed lower. The value of our holdings grew by a further 5% in January, however, this has since dropped back with the prevailing volatility in the market, giving a 12.3% net return on our invested funds since September 2017.

As you can see by the disclosure, we have invested in this strategy with our own funds – now that we’ve got a few months of history under our belt, we’ll be reporting how we are getting on a monthly basis.

 

Disclosure: I am/we are long PERY, CRTO, FNGN, MU, CMC, KLIC, DQ, TOL, TLYS, BNED.

This article was originally published on InvestorsEdge.com. Sign up for free HERE!
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