Tag Archives: events

The Small-Cap Premium Is Still MIA As A Buy & Hold Strategy

Yesterday’s post focused on the discouraging record for value investing over the last decade, but history looks even worse for the so-called small-cap premium in the US stock market. Yes, there have been periods when small cap shines relative to large caps, but the strategy has been a loser as a buy-and-hold proposition since 1980, based on Russell indexes. Excluding the “junk” or focusing on the “value” opportunities in the small-cap realm offers possible solutions, but the original concept using the Russell benchmarks is battered and bruised. Consider the cumulative results of the daily return spread for the Russell 2000 Index (a popular measure of US small caps) less the Russell 1000 (large caps) since the close of 1979. A dollar invested at the start of this period has faded to roughly 70 cents as of yesterday (Apr. 12, 2016). To be fair, there have been multi-year periods during the interim when small caps have outperformed large caps. But over the grand sweep of the last 35 years or so, sans timing, the small-cap concept has been a dog. Click to enlarge There are several explanations for why the small cap premium has been so elusive across the decades, although the most devastating view is that it was all a big head fake. Critics are quick to point out that the disappointing returns for small caps followed the arrival of the famous study by Rolf Banz in 1981 that put the strategy on the map and launched an industry dedicated to mining this premium. But as NYU finance professor Aswath Damodaran recently asked: “The Small Cap Premium: Where is the beef?” Arguably the best case for salvaging the strategy lies with the notion that it’s best to ignore the financially troubled firms. As I discussed last year, a recent study by Cliff Asness of AQR Capital Management and several co-authors – “Size Matters, If You Control Your Junk” – points to a fix by focusing on small companies with relatively strong financials. Nonetheless, small-cap investing as originally conceived comes with a hefty degree of empirical baggage these days. Optimists counter that the general run of disappointing small-cap performance lays the groundwork for hefty opportunities for the years ahead. Meantime, there’s another argument to counter the skeptics: small-cap value is where the real action is, as per the Fama-French research. In a future post, I’ll crunch the numbers and run a reality check on that idea. As for traditional small-cap investing a la Banz, history hasn’t been kind to the original strategy, at least when measured in the Russell indexes as a buy-and-hold setup. That doesn’t mean that the small-cap concept is dead. But some fancy footwork is required to make it work.

5 Simple Trading Lessons From Hell’s Kitchen

By John Benjamin Hell’s Kitchen, one of Chef Gordon Ramsay’s many reality TV shows is quite an entertaining show to watch. Chefs face off to win a grand prize of running their own restaurants at the end. However, the path to success isn’t easy as the contestants are truly put to hell. From having to deal with their peers to putting their differences aside and working as a team, Hell’s Kitchen simply draws the viewer into it. However, this article isn’t a review about Hell’s Kitchen, but rather the lessons a viewer can take away from it. From a trading perspective, there are quite some interesting nuggets of wisdom that can truly help you to become a better a trader. Here are the five biggest lessons that stand out however. 1. Never lose focus Starting from the first episode to the end, a common recurring theme in Hell’s Kitchen is the fact that contents that are the most focused and have their eyes fixed on the prize are the ones who often end up on the tops. There is a bit of luck involved too. But isn’t that the case anywhere? For traders, staying focused on their goals is what determines the best from the rest. There are ups and downs, but that doesn’t mean you have to give up because you hit a losing streak. In Hell’s Kitchen, some of the top chefs hit rock bottom, often coming close to being eliminated. However, some of them manage to bounce back simply through sheer determination and focus to come out on the tops. Never lose focus 2. Preparation is important The main event in every episode of Hell’s Kitchen is the grand service that is put out. This is often a time of high pressure and shows Gordon Ramsay at his very best, swearing at the contestants and going nuts. It is a recurring theme to find contestants either running out of ingredients or failing to have a backup plan. It does sound a bit familiar in the trading world doesn’t it? In the heat of trading, the stress a trader goes through is no different. However, the preparation that one needs to do ahead of trading is very important. Do you take time out to analyze the charts or understand the main driving themes for the day? Do you really have a plan of attack? Always prepare yourself before you start trading. Get to know the markets and what’s driving them 3. Constant learning Another impressive feat from the Hell’s Kitchen winners is the fact that it is not your education or your experience that matters. There have been winners on the show who were not even professional chefs to begin with. What they lack as experience or education is made up by the zeal to learn and improve on their weaknesses. For traders, this is a very important lesson. Learning doesn’t necessarily mean having to buy tons of books and read through them all. Lessons can be found anywhere. From a losing trade to a winning trade, you only need to know where to look. Some of the most successful traders often ensure that they always learn something from a losing trade and most importantly, ensure that they don’t repeat it again. The constant loop of feedback and learning ensures that you overcome your weakness over time. 4. Strategize Every episode of Hell’s Kitchen concludes with a best performer of the evening having to put up two contestants on the hot seat for elimination. Quite often you will come across contestants being put up for elimination in a strategic way. Eliminating the biggest competitor and moving one step closer to the goal. While this works, there are also instances where the strategy backfires, such as the competition being put up for elimination quite early on. An important lesson for traders is strategy and timing. You can have a great strategy, but if you miss out on the timing it can backfire. A great example is where you find a nice reversal candlestick pattern on the charts and you execute it. However, pullbacks can be frustrating. Without correct timing to execute your strategy you could end up under water for quite a while. While strategy is important, timing also plays a crucial role when it comes to your trading plan 5. Consistency is key! Finally, a recurring theme among the winners of Hell’s Kitchen is their consistency to keep up their performance and standards. There are many contestants on Hell’s Kitchen who start with a bang but soon fizzle out under pressure. Likewise, there are contestants who start off weak but manage to rise to the challenge only to peak out and get eliminated. Staying consistent is one of the key aspects for trading as well. Almost any trader at some point has had a winning trade, but if you are not consistent in your trading chances are that you will simply peak out at some point. Consistency is not about having a winning streak; it is all about how well you can trade according to your plan. For traders, consistency plays a big role in the longer term success of your trading. The better you are at consistently churning out winners, the more the chances of you staying in the trading game for the long term. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Beat Weak Q1 Earnings With Revenue-Weighted ETFs

The overall Q1 earnings picture looks bleak, with projected earnings growth deep in the negative territory for the fourth consecutive quarter. In fact, the magnitude of negative revisions over the last three months has been the highest among the recent quarters. Q1 earnings are expected to decline 11.1% versus the 6.4% drop in Q4, as per the Zacks Earnings Trend . However, the projected revenue decline of 2.3% for Q1 is much better than the Q4 revenue decline of 6.6%. Against this backdrop, revenue-weighted ETFs will likely take the lead over earnings-weighted strategies and could be the potential outperformer this earnings season. Why Revenue-Weighted ETFs? First, while a series of headwinds have been weighing on the profitability of companies, the depreciation in the dollar could offer some relief to the top line. As such, many companies could come up with an unexpected growth in revenues in their quarterly reports, giving a boost to the revenue-weighted ETFs. Notably, the ICE U.S. Dollar index, a measure of the dollar’s strength against a basket of currencies, fell to the lowest level in nearly eight months. Second, revenue-weighted funds have outperformed the earnings counterparts in both the short and long-term periods, proving the credibility of the superior weighting methodology. This is because revenues are a better indicator of a company’s financial health. The top line is harder to manipulate or alter on a quarter-by-quarter basis, as opposed to earnings, which can easily be fattened using accounting tricks, thereby leading to inaccuracy. The earnings-weighted ETFs do not reflect the true picture of the company and raise the risk in the portfolio. As a result, tilting toward the revenue metric is a more sensible choice. For investors seeking to do this, there is a small lineup of U.S.-focused ETFs that accomplish this task. Below, we have highlighted the funds that could be great choices for investors seeking to make money from the weak earnings season, while at the same time focus on one of the most important aspects of stock investing. RevenueShares Large Cap ETF (NYSEARCA: RWL ) This fund provides exposure to the top revenue-generating companies within the large-cap segment of the broad U.S. stock market. It consists of the same securities as the S&P 500 Index. Holding 500 stocks in its basket, the fund is concentrated on the top firm – Wal-Mart (NYSE: WMT ) – at 4.7% of total assets, while other firms hold no more than 2.4% share. However, the product has a diverse exposure to a number of sectors, with consumer staples, consumer discretionary and financial occupying the top three positions. The ETF has amassed $320.7 million in its asset base and charges 49 bps in annual fees. Volume is light, trading in about 33,000 shares a day. The fund is up 0.8% in the year-to-date time frame. RevenueShares Mid Cap ETF (NYSEARCA: RWK ) This ETF tracks the S&P MidCap 400 Index, providing exposure to the 400 top revenue generators. It is widely spread across components, with none holding more than 3.26% share in the basket. From a sector look, consumer discretionary, industrial and consumer staples take the top three spots with double-digit exposure each. The fund charges 54 bps in fees per year, while it trades in average daily volume of nearly 22,000 shares. It has accumulated $187.7 million in AUM and has added 3.7% so far in the year. RevenueShares Small Cap ETF (NYSEARCA: RWJ ) This fund targets the small-cap segment of the U.S. equity market. It follows the S&P SmallCap 600 Index and holds 600 stocks. RWJ provides a nice balance across a number of components, with each holding less than 2% share in the basket. However, it is slightly tilted toward industrials and the consumer discretionary sector at nearly 22% each, while consumer staples and financials round off the top four. The product has managed assets worth $276.6 million and sees a light volume of about 30,000 shares per day. It charges 54 bps in expense ratio and is up 2.1% year to date. RevenueShares Navellier Overall A-100 ETF (NYSEARCA: RWV ) This ETF is unpopular and illiquid in this space, with AUM of just $7 million and average daily volume of under 1,000 shares. It tracks the Navellier Overall A-100 Index and weighs securities by the top line. The product holds a basket of 100 stocks, which are concentrated on the top 10 holdings at 54.43% of assets. ADRs make up for 23.9% share, while consumer discretionary and consumer staples round off the top three in terms of sector allocation. Unlike the other three, RWV is pretty spread across various market caps, though large caps account for the largest share at 65% of the total. It charges 60 bps in fees per year from investors and gained 0.4% in the year-to-date time frame. Bottom Line Based on the historical performance, the strategy to weigh stocks by revenue seems one of the most effective factors for weighting the index holdings. Though revenue-weighted ETFs cost more, these have the potential to generate higher returns than their earnings counterpart. Original Post