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Premium Model

Momentum of Fundamentals (Canada)

 

This model is focused on a balanced approach, looking for acceleration of financial metrics on fundamentals, which typically drives profitability and stock price appreciation.  It’s a more conservative methodology, which basically explores the inefficiencies of small and medium cap companies with decent fundamentals but with price disconnected from quality factors.

The model seeks for quality metrics that are also improving, at the rate that fundamentals keep getting better while stock price doesn’t keep up with the same pace.  This is based on this research paper.   Furthermore, the following paper also explains the benefits when combining value, size and momentum, which is used by this model.  Lastly, the model also makes use of these criteria to rank the best stocks.

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 medium-turnover model, and rebalance is done weekly. It holds up to 10 stocks. It only contains stocks from TSX (so no Venture Exchange stocks).

The model initially filter stocks by liquidity, and then it evaluates if fundamentals are improving / growing at a rate higher than peers in the same industry. Several metrics are taken into consideration, to focus on quality and growth, and then separate lists are created per sector, to allow a distribution without overweighting a single sector, in order to mitigate risks. The stocks are then ranking per growth and momentum, and rebalancing on weight distribution is done weekly.

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 (TSX);

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 Universe to stocks to defensive sectors, with metrics aligned with typical recession proof companies. Then, further screening takes place to ensure that:

  • Companies demonstrate fundamental metrics that indicates strong value (with lower price to earnings and price to book, while estimated to grow operational results), and strong quality (with healthy returns on margin, ROIC and ROE, and strong balance sheet);
  • Companies have demonstrated better than estimated results, exceeding expectations in one or more quarters for the most recent fiscal year;


Once a list of stocks are found, then they are ranked from best to worse, where only the top ranked are chosen. The ranking is based on weighted metrics for beta, size, value, profitability and asset growth.

A stock will be sold if these metrics deteriorate for that stock or if market timing rules activates to switch to fixed income.

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Performance Info:

(last updated on December 16, 2018)

 

Stats Info:

(last updated on December 16, 2018)

 

Risk Info:

(last updated on December 16, 2018)

Current Holdings Allocation:

(last updated on December 16, 2018)

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)

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

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