Quant Concepts: A Portfolio for Shopping Sprees

CPMS's Phil Dabo finds a Canadian retail-focused strategy that has done well in both up and down markets and beaten the benchmark 90% of the time

Phil Dabo 23 December, 2020 | 4:38AM
Facebook Twitter LinkedIn

 

 

See more episodes of Quant Concepts here

Phil Dabo: Welcome to Quant Concepts' working from home edition. With the holiday season right around the corner, it's nice to see Canadian retail sales have been trending in the right direction with the most recent quarter up 4% year-over-year. We've seen really good performance coming from the consumer discretionary sector with companies like Aritzia and Sleep Country up around 30% year-to-date.

Today, let's take a look at a strategy that focuses on retail stocks that can really take advantage of consumer behaviour over the holiday season. Let's start by selecting our universe of stocks. In this case, it's a bit unique because we're going to use a list that only has consumer and merchandising companies. Next, we're going to rank our stocks from 1 to 45 according to five key factors.

The first of the three factors is the quarterly sales momentum. The next one is the quarterly earnings momentum. And then, the third is the quarterly cash flow momentum. Ideally, we would like to have retail stocks that achieve really strong revenue with lower costs and hopefully, that will contribute to higher bottom-line earnings. We also want to see companies that generate strong cash flow from earnings. The fourth factor is based on our earnings revision and we would like to see analysts consistently upgrading their forecasts. The last factor is based on the cash conversion cycle. We would like to see a lower number because it indicates that a company is good at converting its investments and inventory into cash flow from sales.

Now, let's go through our buy rules. We're only going to buy stocks that are in the top half of our list, and we want them to have decent liquidity as measured by the volume of shares traded last month. We're only going to buy stocks that are in the top two-thirds of our list based on quarterly cash flow momentum and cash flow to debt. We like to see companies that generate a good amount of cash as a percentage of their total debt outstanding.

Our sell rules are very simple. We're going to sell stocks that are in the bottom 15th percentile of our list based on the five initial factors. We're going to sell stocks that fall to the bottom 15th percentile of our list based on quarterly cash flow momentum and cash flow to debt.

Now, let's take a look at performance. We can see really strong performance since the inception date of January 2002, with the return of 14.7% and an annualized turnover of 57%. We can see that this strategy has beaten the benchmark over every single significant time period, and it's done so with slightly lower market risk as measured by beta. Although the strategy has slightly higher price volatility as measured by standard deviation, it has still generated significantly more risk-adjusted returns as measured by the Sharpe Ratio and has generated very good alpha.

We can see that this strategy has performed very well over time and by looking at the market capture ratios, we can see that this strategy has done well in both up and down markets, which shows why this strategy has beaten the benchmark 90% of the time by looking at the past 10 years annualized return.

This is a great strategy to consider if you're looking for companies that can benefit from consumer behaviour over the holiday season. You can find companies with cyclical properties that tend to do better when the economy rebounds as well as companies with countercyclical properties that tend to have better downside protection. You can find the buy list along with the transcript of this video.

From Morningstar, I'm Phil Dabo.

Table of retail stock

Get the Latest Personal Finance Insights in Your Inbox

Sign up for the Latest Here

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Aritzia Inc36.40 CAD1.53
Sleep Country Canada Holdings Inc27.73 CAD-2.15

About Author

Phil Dabo  Phil Dabo is Director, CPMS Sales

© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies