Quality Portfolio: By The Numbers

Today I will dive deeper into the High Quality Portfolio that was unveiled last week. But before we delve into the material, here’s a quick fun fact about “Quality At A Fair Price.”

The newsletter has a reader base that spans 31 different countries and 33 U.S. states. Globally, outside the United States, the largest subscriber count comes from Canada. Within the United States, the most subscribers call Pennsylvania their home. Shoutout to my Canadian friends, those of you from Pennsylvania and the rest out there!

Quick Performance Update

I know the Portfolio was unveiled just a week ago, but I’ve been tracking it since the start of the year. At the risk of playing “Monday morning quarterback”, I was pleased to find out it did not perform too well in January. The portfolio returned +1.32%, compared to +1.59% for SPY and +0.14% for SCHD. The main driver of the underperformance was a very poor return from MarketAxess Holdings (MKTX) that fell by 22.99% last month. Here are the individual returns for all 25 stocks for the month of January.

Many of the stocks included in this portfolio started the year on a positive note, delivering market beating returns. Some performed more modestly and a handful performed rather poorly relative to the S&P 500. A single month’s return is meaningless, had the portfolio delivered a very strong or a very weak return it wouldn’t have much bearing on my outlook for this strategy. The true effectiveness of this portfolio can only be measured over a much longer period of time. However, by the time I truly know whether this strategy will deliver alpha, it’ll be too late to benefit financially from it. Here in lies the “risk” of investing, you have to be confident in your strategy and decide that the risk is worth the potential reward.

In last week’s newsletter I also mentioned a more aggressive version of the portfolio, leveraged on the findings of my valuation study, that favored potentially undervalued stocks. This portfolio got off to a worse start, delivering only +0.17% in January. The 5 favored stocks for January were: ADP, JNJ, MKTX, TSCO and ZTS. Two of these stocks had strong returns last month, one performed average and two posted negative returns. Again, this is a long term portfolio and short-term underperformance is to be expected. In the study the tested portfolios underperformed for as much as 6 to 9 consecutive months at a time. However, in the long run (6 year test window) the application of the more aggressive strategy turned out to be quite fruitful.

I personally have a long position in each and every one of the stocks included in this portfolio.

Long Term Winners

The 25 stocks chosen to be part of this portfolio were carefully selected in a quantitative way. They were chosen for their track record of growth, strong fundamentals and a commitment to dividend growth. Today, I’d like to share with you each stocks track record of beating the S&P 500.

There are few stocks that consistently outperform this index each and every month. However, when we review return data over rolling 5 year periods the level of success can point out clear winners. Here’s each stocks track record of outperforming the S&P 500 over rolling 5 year periods.

Abbvie (ABBV)

Outperformed the S&P 500 during 61 out of 74 rolling 5-year periods. Success rate: 82.43%

Current Streak: past 7 rolling periods.

Accenture PLC (ACN)

Outperformed the S&P 500 during 211 out of 211 rolling 5-year periods. Success rate: 100%

Current Streak: past 211 rolling periods.

Automatic Data Processing (ADP)

Outperformed the S&P 500 during 340 out of 407 rolling 5-year periods. Success rate: 83.54%

Current Streak: 0 periods (underperformed during the past 3 rolling periods - margin is less than 1%).

Applied Materials (AMAT)

Outperformed the S&P 500 during 267 out of 406 rolling 5-year periods. Success rate: 65.76%

Current Streak: past 93 rolling periods.

ASML Holdings N.V. (ASML)

Outperformed the S&P 500 during 242 out of 287 rolling 5-year periods. Success rate: 84.32%

Current Streak: past 180 rolling periods.

Broadcom (AVGO)

Outperformed the S&P 500 during 114 out of 114 rolling 5-year periods. Success rate: 100%

Current Streak: past 114 rolling periods.

Cintas (CTAS)

Outperformed the S&P 500 during 259 out of 347 rolling 5-year periods. Success rate: 74.64%

Current Streak: past 117 rolling periods.

Domino’s Pizza (DPZ)

Outperformed the S&P 500 during 152 out of 175 rolling 5-year periods. Success rate: 86.86%

Current Streak: 0 periods (underperformed during the past 12 rolling periods - margin has shrunk over the last 3 months).

Expeditors International of Washington (EXPD)

Outperformed the S&P 500 during 261 out of 347 rolling 5-year periods. Success rate: 75.22%

Current Streak: 0 periods (underperformed during the past 2 rolling periods).

Fastenal (FAST)

Outperformed the S&P 500 during 259 out of 347 rolling 5-year periods. Success rate: 74.64%

Current Streak: past 48 rolling periods.

Home Depot (HD)

Outperformed the S&P 500 during 301 out of 406 rolling 5-year periods. Success rate: 74.14%

Current Streak: past 3 rolling periods. Prior to October 2023, Home Depot had a streak of 147 rolling periods and it missed the S&P 500 rolling 5 year return through October 2023 by 0.75%.

Johnson and Johnson (JNJ)

Outperformed the S&P 500 during 289 out of 407 rolling 5-year periods. Success rate: 71.01%

Current Streak: 0 periods (underperformed during the past 44 rolling periods).

KLA Corporation (KLAC)

Outperformed the S&P 500 during 254 out of 347 rolling 5-year periods. Success rate: 73.20%

Current Streak: past 134 rolling periods.

Lockheed Martin (LMT)

Outperformed the S&P 500 during 258 out of 407 rolling 5-year periods. Success rate: 63.39%

Current Streak: 0 periods (underperformed during the past 11 rolling periods).

Lam Research (LRCX)

Outperformed the S&P 500 during 248 out of 347 rolling 5-year periods. Success rate: 71.47%

Current Streak: past 93 rolling periods.

Mastercard (MA)

Outperformed the S&P 500 during 153 out of 153 rolling 5-year periods. Success rate: 100%

Current Streak: past 153 rolling periods.

MarketAxess Holdings (MKTX)

Outperformed the S&P 500 during 148 out of 171 rolling 5-year periods. Success rate: 86.55%

Current Streak: 0 periods (underperformed during the past 10 rolling periods).

Monolithic Power Systems (MPWR)

Outperformed the S&P 500 during 150 out of 171 rolling 5-year periods. Success rate: 87.72%

Current Streak: past 111 rolling periods.

MSCI (MSCI)

Outperformed the S&P 500 during 108 out of 135 rolling 5-year periods. Success rate: 80.00%

Current Streak: past 100 rolling periods.

Rollins (ROL)

Outperformed the S&P 500 during 282 out of 374 rolling 5-year periods. Success rate: 75.40%

Current Streak: 0 periods (underperformed during the past 6 rolling periods).

Tractor Supply (TSCO)

Outperformed the S&P 500 during 209 out of 300 rolling 5-year periods. Success rate: 69.67%

Current Streak: past 30 rolling periods.

Texas Instruments (TXN)

Outperformed the S&P 500 during 280 out of 407 rolling 5-year periods. Success rate: 68.80%

Current Streak: 0 periods (underperformed during the past 1 rolling period).

UnitedHealth Group (UNH)

Outperformed the S&P 500 during 256 out of 347 rolling 5-year periods. Success rate: 73.78%

Current Streak: past 130 rolling periods.

Visa (V)

Outperformed the S&P 500 during 131 out of 131 rolling 5-year periods. Success rate: 100%

Current Streak: past 131 rolling periods.

Zoetis (ZTS)

Outperformed the S&P 500 during 73 out of 73 rolling 5-year periods. Success rate: 100%

Current Streak: past 73 rolling periods.

Clearly some of these companies have performed much better than others, relative to the S&P 500 measured on rolling 5-year periods. ACN, AVGO, MA, V and ZTS all have perfect records, but each company has been trading publicly for a much shorter duration of time compared to the other 20 companies tested. I think its interesting to note that none of these companies had a rate of success lower than 60%. Those are very favorable odds for the individual investor.

Thank you for reading the newsletter, I wish you a great rest of your day!