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Premium Model

Business Expansion (US)

This model is focused on a balanced approach, focusing on quality companies from the Russell 1000 Universe that are expanding their  business through acquisitions or other investments.

The model seeks financial metrics for a growing debt while having a solid financial health through a manageable debt-service coverage ratio, and enough quality metrics to support cash flow rate and growth. The list is further filtered through a rank based on quality and valuation.

To provide a better risk adjusted return, market timing rules are enabled to mitigate the risks associated with a market crash due to recession or weaker fundamentals across multi sectors.

This is a low-turnover model, and rebalance is done every 4 weeks. It holds up to 12 stocks from Russell 1000 Universe. It includes stocks that growing market cap, so they are perfect candidates for this model.

The main idea is that not all debt is bad:

First, the government encourages businesses to use debt by allowing them to deduct the interest on the debt from corporate income taxes.

Second, debt is a much cheaper form of financing than equity. It starts with the fact that equity is riskier than debt. Because a company typically has no legal obligation to pay dividends to common shareholders, those shareholders want a certain rate of return. Debt is much less risky for the investor because the firm is legally obligated to pay it. In addition, shareholders (those that provided the equity funding) are the first to lose their investments when a firm goes bankrupt. Finally, much of the return on equity is tied up in stock appreciation, which requires a company to grow revenue, profit and cash flow. An investor typically wants at least a 10% return due to these risks, while debt can usually be found at a lower rate.

These facts make debt a bargain. It would not be rational for a public company to be funded only by equity. It’s too inefficient. Debt is a lower cost source of funds and allows a higher return to the equity investors by leveraging their money.

So why not finance a business entirely with debt? Because all debt, or even 90% debt, would be too risky to those providing the financing. A business needs to balance the use of debt and equity to keep the average cost of capital at its minimum. This metric is called weighed average cost of capital or WACC.

There is a difference between a business growing debt for further expansion, which will reflect in higher earnings and cash flow, versus a business growing debt due to challenges to stay afloat. Using quantitative analysis to ensure that key quality metrics are in place makes the difference maximize success when trading companies that are increasing debt to grow further.   

This is a mechanical model that chooses what to buy and sell based on a set of rules. Therefore, there will be losing trades from time to time. By no means it reflects a broken strategy. No model can outperform at all times, so it’s paramount to have the proper temperament to stick what a strategy that is aligned to your goals and risk tolerance.

See backtest information below to evaluate how these rules would have worked since 1999:

Model summary, including variable slippage (starting capital was $50,000) and fixed commission of $4.95:

 

Performance summary:

 

Detailed performance summary which provides max drawdown and % stock invested periods (log scale):

 

Stats information below, with winners, losers and how long typically these stocks are held for:

 

Below are various risk indicators as well:

 

Since the model typically holds positions for 1 month on average, the following histogram was run, to evaluate how consistently the model would perform if it started at different periods (roling offset was set to 1 week, while the performance period was set to 1 month); below is the histogram excess performance when compared to the benchmark (TSX):

 

And below is the same histogram, but showing the actual model portfolio performance, instead of the excess when compared to the benchmark (Russell 1000 ETF);

The first screening criteria is related to the market timing, to either be in equities or cash.  This market timing rules use data from micro-elements (earnings and price movement trends for the whole market) as well as macro-elements, such as economic indicators (which might drive prices lower, regardless of solid fundamentals) to issue a sell all signal (move to cash) or buy according to the rules of this model.

The next screening criteria (buying as per the rules of this model) rules narrows down the Russell 1000 Universe. Then the model filters the stocks by liquidity, debt growth and market sentiment by growing price ratio. The stocks are then ranked by quality and valuation, looking for consistent EPS growth and results that exceeded market estimates – an indicator that those investment / acquisition synergies are paying off – as well as profitability ratio, projected earnings growth while seeking a stable or lower price to sales ratio.

In order to maximize profit with a lower correlation than other trading models, sell rules are based on technical analysis (momentum decelarating) or fundamentals change (either debt being payd as a sign that most growth has been capitalized or if quality metrics deteriorate).  Or if market timing rules activates to switch to fixed income.

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2nd model 10% discount (applied to the 2nd model)
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8th model 70% discount (applied to the 8th model)

 

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Performance Info:

(last updated on October 20, 2019)

 

Stats Info:

(last updated on October 20, 2019)

 

Risk Info:

(last updated on October 20, 2019)

 

Current Holdings Allocation:

(last updated on October 20, 2019)

Cost of this model:  $23 / month. Cancel anytime.

Interested in subscribing to multiple models? Discounts are available when subscribing to 2 or more models. Simply subscribe to your first model and then let us know which model you want to subscribe next, and we’ll send you a discount coupon.

Discount rates:

1st model full price
2nd model 10% discount (applied to the 2nd model)
3rd model 20% discount (applied to the 3rd model)
4th model 30% discount (applied to the 4th model)
5th model 40% discount (applied to the 5th model)
6th model 50% discount (applied to the 6th model)
7th model 60% discount (applied to the 7th model)
8th model 70% discount (applied to the 8th model)

Got questions?  Check our Frequently Asked Questions for Premium models or contact us.

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