R-Squared EPS Growth Strategy
File Name: bt_sow_r_squared_eps_growth.und
Compounded Return (12/26/08 through 05/07/10): 59.4%
This strategy has been steadily beating the market year after year and this year is no exception.
Currently, this strategy is producing on average of 4.2 stocks to hold in your portfolio at a time. The typical holding period (rebalancing period) is 4 weeks.
It's a very easy strategy to trade and could even be classified as a somewhat conservative strategy. But the returns are anything but.
This is a nice addition to virtually anyone's portfolio mix.
How This Strategy Works
The R-Squared Growth Rate is a measure of how close the actual earnings come in to the earnings growth on a regression basis.
In other words, how closely do the earnings conform to the regression line?
The range for an R-Squared value is between 0 and 1. The higher the value, the closer the data points are at matching the regression line. (In this example, the data points are EPS growth numbers.)
A value of 1 means the data is a perfect fit. Zero (0) is the worst.
The reason why someone would want to use this is to get a sense of the stocks ability to produce trend line EPS results. Of course there are no assurances that future data points won't veer off course. But knowing how closely matched the data points have been is good to know.
What's interesting is that the distribution of the R-Squared values for the stocks in the Universe (database of over 8,300 stocks) is an inverted bell curve (or well curve) distribution. 25% of the stocks had a value of .33 to .66. But roughly 38% of the stocks had lower values. And roughly 38% had higher values.
Usually, with a normal distribution, the majority of the data falls within the middle values with the smaller amounts of data falling on either side to form a symmetrical bell curve.
This distribution was the exact opposite.
In our testing we found that the outside values (> .66 to 1 for the 'best' fit and < .33 to 0 for the 'worst' fit) proved to be the most unreliable while the upper middle values significantly outperformed not only the other ranges but the market as well.
- Price >= 5
- Volume (Avg. 20 Day Shares) >= 100,000
- Zacks Rank <= 2 (Only Buys and Strong Buys)
- R-Squared EPS Growth: In (range) between .50 and .66
(Above the median and one of the best tested ranges, i.e., EPS growth rates that show a 50% to 66% fit with the growth rate regression.)
- PEG ratio <= 1
- P/E Using 12 Month EPS: In (range) 5 and 15
- % Change Price over 4 weeks > -5
(In order to qualify, a stock cannot have dropped more than -5% over the last 4 weeks.)
This strategy will typically produce a diverse set of stocks from different industries and market caps.