Oct 19 Stock Selection (PDC Energy, Inc. & 134 stock volatility minimization portfolio)
Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.
Updated: November 25, 2020 with stock performance (significantly outperformed the SPY and QQQ benchmarks 46.24% vs. 5.57% and 4.17%).
We select stock PDC Energy, Inc. (PDCE) as a buy. We also suggest it will have short-term volatility (up and down). We have seen near-term volatility in the stock portfolios we have selected in the past 2 months.
We also selected a 134 stock portfolio of ‘all stars,’ evenly weighted (not capitalization weighted) that should move as a group to minimize volatility while keeping market exposure. This is a volatility minimization strategy.
We suggest holding PDCE, or the 134 stock ‘all star’ portfolio, for up to 5-weeks starting October 20. We have seen performance hold for 25 days. Our October 20 selection is based on 251 days of historical trading data, ending October 19 (market close).
This week we see one stock (PDCE) with the best Chicago Quantum Net Score, and a set of three stocks (PDCE, AXL, LPI) was picked in 2nd place.
This stock was selected based on current market data (last night’s close).
Step 1 is an analysis of all 3,211 US common stocks that pass data validation against our Chicago Quantum Net Score (CQNS) methodology. We pick a 134 stock portfolio that we call our ‘all stars.’ They read like a ‘who’s who’ of popular tech stocks. Here is the list of 134 ‘all stars’ before market open.
134 stock ‘all stars’ portfolio we selected: stocks = “ADBE ADP ADUS AEP AKAM ALEC AMAT AMD AMGN AMK AMP ANET ANTM APD ATUS ATVI AVGO AXL BA BAM BHF BLK BPMC BR BX CCR CEVA CINF CNS CPK CRM CRUS CSCO CSGP CTSH CVNA CVU D EBR EPAM EPZM EQH ETY FB FE FFIN FIS FR GFF GLOB GLW GNRC GOGL GOOGL GPN HD IAC ILMN INS INTU IPAR IPHI IQV ISRG IVZ JKHY KLAC KPTI L LMT LOW LPI MAS MCK MCO MDLZ MEDP MNST MOH MRCY MRK MSCI MTSI MU NEE NTNX NVDA ORCL OXY PAYX PDCE PEGA PEP PFE PG PINS POOL PRU PUK PXD QCOM RJF RMD ROKU RXN SABR SBAC SEIC SNPS SQ SWKS SYK TFX TMBR TROW TXN UEC UIS UNH UNM USA USB VLO VNCE VRSK VRSN WBK WF WMT XRAY YEXT YORW ZDGE ZUO”.
Step 2 is a deeper analysis within those 134 stocks to create a smaller, institutional investor list of stocks that minimizes volatility minus expected return (raised to a CQNS_power). With multiple stocks, we see offsetting price movements (zigs and zags) and price movement activity. We saw this with our picks last week (AX and MCRB) (prior article).
To watch presentations or read our papers on how we select stock portfolios, click here.
This week we select PDCE (PDC Energy, Inc.). This stock alone has the best CQNS score. It is unusual for one stock to be selected. Details below, including 83% holdings by institutional investors.
Here is the chart two days later. The stock broke out to the downside on subdued volume (1.18M shares vs. average volume of 1.35M shares). Earnings will come out on Nov 4, 2020.
The statistics about the company show a few surprises. 95.7% gross martins, but -42% operating margins. Book value per share of $26.56, which exceeds the stock price, and a BETA of 3.21 which is based on historical volatility with the market (and we expect front month oil contracts).
We also see the analyst coverage of this stock, which is generally positive and calling the stock well above today’s price of $11.27.
Where are we with this stock? We bought as the stock dipped (after we made our selection before market open) and sold within 2 days for a 6.32% profit. We then re-entered the position below our first buy point, rode the position higher, and watched it, and the market, fall yesterday. We added slightly to our position at the lower price.
A second place portfolio includes three stocks: PDCE (PDC Energy, Inc.), AXL (American Axle & Manufacturing Holdings, Inc.), and LPI (Laredo Petroleum, Inc.). These stocks are smaller capitalization picks, ($1.262B, $754.4M, $104.6M).
We analyze an almost unlimited universe of stocks classically using different classical solvers, including a simulated bifurcator, simulated annealer, genetic algorithm and fat-tailed Monte Carlo. We select a portfolio in about an hour from a universe of 10⁹⁶⁶ portfolios.
We built this model to test the limits of quantum computers. This week’s run did not use results from the D-Wave Systems Advantage 1.1 system. The quantum annealer had a wait time of > 10 minutes per run, and failed to embed 134 stocks 2/3 of the time.
Note 1: We adjusted our CQNS_Power value twice without a change in the solution.
Note 2: We change our method of data validation, adding extra checks and substituting a ‘1’ for missing price data. Previously we had dropped all stock information for a day if any one ticker had missing data post validation. We are still evaluating validation methods, and will continue to evolve.
Note 3: We substitute ETF prices for market index option prices in the calculation of BETA in Step 1. This lowers BETA values. We will make this change in Step 2 shortly.
Contact us for more information about our methodology.
This is not investment advice. We are not registered investment advisors. This is in research and development and our methods, tools and formulations are subject to change without notice.
The author is long PDCE. This position was started after publishing this article.
Update: November 25, 2020: The author is no longer long PDCE. The author exited the position on November 2, 2020.
Update: We are 26.5 trading days into this position. PDC Energy, Inc. (PDCE) rose 45.53% against a SPY benchmark of 5.55% and QQQ of 4.17%. This was a winning portfolio and stock pick made by our Chicago Quantum Net Score. We are past the 25 trading day limit of our analysis.
Updated: This was probably ‘beginner’s luck’ and we hope to repeat this success into the future.
For more information and to have us run a unique portfolio for you, please visit our website at https://www.chicagoquantum.com.