Quant Stock Ratings – Feb 2023

Quantitative Stock Rating Model: Performance and Discussion

Our quantitative stock rating model, launched at the beginning of 2022, uses composite factors across five dimensions (value, quality, momentum, estimates, and investment) to predict individual stock performance. The stock rating model produces a list of 100 favored investments from across the S&P 500.

Fig. 1 shows the performance for each of the 5 composite factors that make up the stock rating system (dark blue bars), along with the overall performance (light blue bar at right) during January. While the overall system outperformed the S&P 500 by 1.15%, the performance across the composites was quite varied, with the value composite earning nearly 2.9% of outperformance, while the momentum composite underperformed the overall index by 2.8%.

Seeing momentum underperform in January is not unusual – historically, January tends to be one of the weaker months for momentum. This dynamic flips in February, as February tends to be a much better month for the performance of the momentum composite.

Introducing the Concentrated Portfolio

The stock rating system produces a list of 100 stocks that make up its favored basket. We track this basket in reporting the historical performance of the stock rating model. In this note, we introduce a concentrated portfolio of 25 large-cap names that are most favored by the stock rating system. The concentrated portfolio, like the full stock rating system portfolio, consistently outperformed the S&P 500 in backtests (see Fig. 2).

From Fig. 2, we see that, like the overall stock rating system, the concentrated portfolio outperforms the S&P 500 in both up years (such as 2009, 2013 and 2021) as well as down years (such as 2008 and 2022). On average, the concentrated portfolio generates approximately 5.5% of outperformance per year relative to the S&P 500.

In Fig. 3, we show the current constituents of the concentrated portfolio, along with their weights. We will continue to update this portfolio on a monthly basis going forward.