The stock market has shifted away from custom, optimized Sharpe portfolios of profitable companies

By Jeffrey Cohen, President and Founder, US Advanced Computing Infrastructure, Inc. A consultancy and investment advisory firm.

Today we ran our model after selecting for US-listed common stocks from profitable companies with a positive book value whose shares traded continuously for the past year. We found no edge over passive US equity index ETFs.

These 1,601 profitable firms with positive book value have the following attributes:

• Lower than expected variance (3.4 x 10–5) and an expected return of 8.77% over the next year.
• The best stocks trade with a Chicago Quantum Net Score that is roughly equivalent to the major US equity index ETFs (SPY, QQQ and IWM).
• We have very few stocks with extreme kurtosis scores (4 out of 1,601). We have more extreme skewness stocks (13 of 1,601), and 12 of them are negative skew stocks, in order: EXLS, ORGN, ROG, DRVN, SYNH, HE, RCM, OLPX, AAP, FHN, EYE and CHGG.
• In avoiding the debt ‘filter’ we doubled the number of shares, but many more that paid dividends or distributions of 5% or more in the past year (188 out of 1,601).
• We now have only one negative beta stock, FI or Fiserv Inc., with a negative BETA score of -0.182.

The results of the analysis are troubling for the overall market. The best portfolio had less than one tick of alpha, and required 58 stocks, evenly held. An investor is better off buying and holding a passive US equity ETF.

Why is the result so limited? It could be that there are unprofitable companies ‘where the action is at’ and are trading in ways that allow for excess returns. It could be that the returns of the market are so low, and the risk-free return is so high, that investors are better off staying passive, or on the sidelines.

Conclusion: We increased our universe of US-listed common stocks to include all profitable stocks with positive book value. The best current strategy is to buy and hold passive US equity index funds, or to exit the market. Custom Chicago Quantum Net Score portfolios based on selecting from profitable firms with positive book values does not provide an edge at this time.