Beat the Market with Yearly Stock Picks: A 48% Annual Return Strategy
In the pursuit of investment success, finding strategies that consistently beat the market is the ultimate goal. Yet, year after year, the majority of investors still struggle to outpace the benchmark. Thus, we would like to introduce a yearly stock pick strategy that focuses on owner earnings growth and focus on the trending momentum.
Part 1: Unveiling the Champions: Our Stock Selection Criteria
Our stock selection process is designed to identify the market’s hidden gems: companies with robust owner’s earnings growth and an upward momentum.
Criterion #1: Five Years of Unwavering OEPS Growth
We used a fundamental metric: owner’s earnings per share (OEPS) which provides a more comprehensive picture of the company’s financial health than traditional EPS. OEPS considers net income and non-cash expenses like depreciation and amortization. By shortlisting a minimum 5-year consecutive increase of OEPS, the selected company is generating profits and value for the owner. Besides, it’s important to make sure the past 5 years OEPS has been generating positive profits and value for the owner.
Criterion #2: The OEPS Powerhouse: Highest YoY OEPS Growth
We pick only the top 5 companies with the latest YoY OEPS Growth
Criterion #3: Riding the Momentum Wave: SMA20 and SMA 60 Confirmation
A Simple Moving Average of 20 (SMA20) moving above SMA 60 is defined as an uptrend. We only buy the stock confidently striding above SMA20 and SMA 60 to ensure we ride the wave of momentum
Part 2: Portfolio Management and Back testing:
- Data extraction: We are extracting the fundamental data of OEPS for each company’s historical and daily stock price from FMP which Financial Modeling Prep.
2. Calculate the growth of OEPS and perform the following criteria on the buy and sell strategy.
We had defined April as a new cycle of stock pick selection where we assume March is the last month of the past year financial report to be released for all companies.
buy: Buy when the last 5 years have a YoY OEPS, positive value in last 5 years OEPS, top 5 highest YoY OEPS, the price is above SMA 20, and SMA 20 is above SMA 60
Sell: sell when the price is below SMA 20 or SMA 20 is belove SMA 60
Thus, we should first pick 5 stocks based on the fundamentals of OEPS and trade it based on SMA.
3. Lastly, we run the backtesting.
We will assume that the portfolio is reviewed daily and that SMA is calculated using the closing price. Thus, it’s important to move our signal generated using Python one day backward. Lastly, we will compare our strategy with QQQ as a benchmark.
Part 3: Results and Analysis:
We performed the backtest by assuming trade using an Open Price.
Based on the chart, we can see that the strategy of yearly stock pick strategy performs better than QQQ in terms of annualized and maximum drawdown.
Summary Result:
Annualized return of Owners Earning Per Share strategy(Open Price): 48.85%
MDD of Owners Earning Per Share strategy(Open Price): -14.67
Annualized return of QQQ without trailing: 33.64%
MDD of QQQ without trailing: -35.12%
In a nutshell, the yearly stock-picking strategy reveals a robust framework for investors seeking to not only navigate the market but to outpace it. The key benefits resonate in the meticulous selection criteria employed — anchored in five years of unwavering Owner’s Earnings Per Share (OEPS) growth. This criterion ensures that our chosen stocks not only generate profits but consistently add substantial value for stakeholders.
I uploaded my backtest code and output to GitHub. Feel free to try it out. You may consider signing up for financial modeling prep which contains a lot of fundamental data, historical price data, and calculated metrics such as the OEPS which had calculated to assist us with back test or real time auto trading. Besides, we can retrieve the historical data and finance ratio for the past 30 years. There are more backtests we can try up for the stock pick by using fundamental metrics such as ROA, ROE, EPS, or sentimental analysis of news to perform another backtest which would help investors to make better data-driven decisions. If you have plan to sign up and you think my article helps, you can sign up through my link: https://utm.guru/ugfyi
Reference:
- https://www.oldschoolvalue.com/stock-valuation/what-is-owner-earnings/
- https://site.financialmodelingprep.com/developer/docs?utm_campaign=peiying1&utm_medium=blog&utm_source=medium#daily-chart-charts
3. https://site.financialmodelingprep.com/developer/docs?utm_campaign=peiying1&utm_medium=blog&utm_source=medium#owner-earnings-statement-analysis
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