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MarketGrader 100 Index Rebalance Notes

August 2018

Carlos DiezCarlos Diez

MarketGrader’s flagship U.S. index, the MarketGrader 100 (MGONE), closed another successful six-month period last Friday, August 17 when it completed its customary semi-annual reconstitution and rebalance. Having recovered smartly from the brief but scary market swoon of early February, MGONE gained 7.0% during the period, well ahead of the U.S. market’s 4.9% rise as measured by the Russell 3000 Index. Among the market’s size benchmarks MGONE trailed only small caps, which had a phenomenal run during the last six months based on a price return of 9.7% for the Russell 2000 Index. This caps a remarkable one-year stretch for small caps, which gained 24.7% since last August. MGONE, however, wasn’t far behind, gaining 22.6% in the last year, well ahead of the Russell 3000 Index’s 18.2% and the S&P 500 Index’s 17.5% (an outperformance vs. the S&P of 510 basis points), as can be seen in Figure 1. Interestingly, following such strong performance for small caps, MGONE tilted slightly towards larger names during the most recent reconstitution. From a size perspective, the index lost one mid cap name ($1 billion to $10 billion) and nine small caps (below $1 billion); all ten slots were allocated to its large cap segment (above $10 billion). Thus, the newly reconstituted MGONE now has 40% of its weight in large caps, 56% in mid caps and only four percent in small caps.

Figure 1. MarketGrader 100 Index’s One-Year Performance vs. Benchmarks

Source: Bloomberg

Among the 100 companies selected to the index in February, 57 contributed positively to its performance, with an average price return of 20.3%, while the remaining 43 generated a drag on performance, with an average return of -10.9%. Among the gainers, five stocks stand out with six-month price returns in excess of 50%. These included Insperity, Inc. (NSP), which gained 78.5%; Health Insurance Innovations (HIIQ), up 77.2%; Viper Energy Partners (VNOM), up 64.0%; Ligand Pharmaceuticals (LGND), up 57.8%; and Shake Shack (SHAK), which returned 53.2%. All five stocks were subsequently removed from the index during last week’s reconstitution, largely as a result of stretched valuations, a good illustration of how MarketGrader’s rigorous discipline ensures not only profit taking every six months but also keeps investors from overpaying for growth.

Overall, 77 companies were replaced during the index’s latest rebalance, once again above its 63% historical average turnover dating back to MGONE’s inception in 2003. This was, however, slightly lower than the prior three rebalance periods. From a sector perspective, the two consumer-driven sectors were the biggest losers in this latest reconstitution, with Consumer Discretionary losing a net five names, down to an overall weight of just 12%, relatively light by the sector’s historical standards (it had reached a 25% allocation a year and a half ago, during the February 2017 rebalance). Consumer Staples, meanwhile, shed all four names from the February period and failed to pick up a single one, leaving it completely unrepresented in MGONE, at least for the next six months, the first time this happens in the last five years. These sector fluctuations are a natural part of MarketGrader’s grading and index selection process, as the methodology is sector agnostic and simply looks for the best values across all U.S. equities, irrespective of industry or sector.

With both Consumer sectors exhibiting some weakness based on MarketGrader’s rigorous fundamental grades, much of the slack was picked up by Industrials, which continues to show remarkable strength in MarketGrader’s rating system, with the sector once again maxing out at 25%. This is the second consecutive rebalance period in which Industrials are maxed out in MGONE; in fact, had it not been for the index’s methodology sector cap, an additional three Industrial companies would have been selected last week. The other sector that continues to stand out in MarketGrader is Financials, with MGONE’s allocation not only climbing from 21 names selected in February to 25 in this most recent rebalance but, also with the sector cap rule preventing an additional eight companies from the sector being selected to the index, which would have given it almost a third of MGONE’s overall weight; the majority of these companies, by the way, are Regional Banks. That both of these sectors continue to exhibit such fundamental strength speaks well of the underlying vitality of the U.S. economy, especially encouraging as it suggests that consumption isn’t being required to do all the heavy lifting, often typical of the latter stages of expansionary economic cycles. Figure 2 displays the allocation shifts among these four sectors—Consumer Discretionary, Consumer Staples, Financials and Industrials—in the last five years. Among the remaining sectors, the one with the largest representation was Technology, now accounting for 16% of the index, followed by Health Care with eight names and Energy and Materials with seven names apiece.

Figure 2. MGONE Allocations to Consumer Discretionary, Consumer Staples, Financials and Industrial Sectors 2014-2018

Source: MarketGrader

MGONE selected 46 companies for the very first time, including such notable names as Costco Wholesale (COST), PNC Financial Services (PNC), Norfolk Southern (NSC), Aflac (AFL) and TD Ameritrade (AMTD). An additional 13 companies made their reappearance in MGONE after an absence of more than two years, including Valero Energy (VLO), Concho Resources (CXO) and Freeport-McMoRan (FCX) as the recovery in the shares of Energy and Materials stocks continues.

Irrespective of the index’s turnover on any given rebalance period we always like to highlight the names among the current crop of constituents that have been regulars in MGONE, even if they miss a semester or two. Notable among the new list are MAXIMUS (MMS), Steven Madden (SHOO), and Freeport-McMoRan (FCX), all of which have been selected to the index nine times since its inception; NVR, Inc. (NVR) with 11 selections; Mastercard (MA) with 12 selections; Booking Holdings (BKNG), formerly Priceline, with 13 selections and Apple (AAPL) with 17 selections. The complete list of MGONE constituents following this latest rebalance is available in Appendix 1.

MGONE and the Bull Market

As stocks continue to grind higher, investors will start seeing this week plenty of references to what is now the longest bull market in history. As followers of MGONE will inevitably wonder how the index has done relative to the market benchmarks, we figured some context might be appropriate.

Since the market bottomed on March 9, 2009, the S&P 500 Index has gained, on a price return basis, an impressive 323%. The overall market, as measured by the much broader Russell 3000 Index, which represents approximately 96% of the U.S. equity market’s investable universe, gained 337% during the same period. Small caps, as measured by the Russell 2000 Index, rose a remarkable 400%. Meanwhile, the MarketGrader 100 Index, which is size-agnostic in its selection, gained 426% on a price-only basis between the market bottom in 2009 and Tuesday, August 22, outperforming the overall U.S. market by 89 percentage points.


Appendix 1.
MarketGrader 100 Index Constituents – August 2018 Rebalance

Ticker Company Name Overall Grade Market Cap*
Consumer Discretionary
BKNG Booking Holdings Inc. 64.7 88,025.40
CMCSA Comcast Corporation Class A 72.8 160,551.00
COST Costco Wholesale Corporation 60.3 96,286.30
IPG Interpublic Group of Companies 63.7 8,385.70
MTN Vail Resorts, Inc. 67.3 11,600.70
NTRI Nutrisystem, Inc. 73.8 1,189.54
NVR NVR, Inc. 75.0 9,667.66
SHOO Steven Madden, Ltd. 64.1 3,293.55
SYX Systemax Inc. 63.8 1,357.88
TSCO Tractor Supply Company 64.2 9,682.28
WLH William Lyon Homes Class A 61.0 789.93
YUMC Yum China Holdings, Inc. 62.8 13,114.70
CXO Concho Resources Inc. 65.5 27,227.90
EGN Energen Corporation 63.4 6,956.32
LBRT Liberty Oilfield Services Inc. 84.2 1,397.76
MTDR Matador Resources Company 66.1 3,656.19
SHLX Shell Midstream Partners LP 75.3 5,008.91
TCP TC PipeLines, LP 66.7 2,330.99
VLO Valero Energy Corporation 67.1 49,061.00
AFL Aflac Incorporated 64.3 35,549.10
AMTD TD Ameritrade Holding Corp 61.6 32,804.60
APAM Artisan Partners Asset Manag 60.7 1,792.07
ASB Associated Banc-Corp 66.2 4,637.93
BOKF BOK Financial Corporation 62.0 6,382.92
BXS BancorpSouth Bank 64.9 3,345.80
CADE Cadence Bancorporation Class A 63.7 2,331.47
CATY Cathay General Bancorp 69.2 3,365.62
CMA Comerica Incorporated 70.5 16,498.90
FII Federated Investors, Inc. Class B 69.2 2,257.29
GWB Great Western Bancorp, Inc. 69.6 2,459.58
HBAN Huntington Bancshares Incop 70.5 17,347.50
HLNE Hamilton Lane Incorporated 62.5 1,071.80
KEY KeyCorp 66.9 22,282.20
MA Mastercard Incorporated Class A 65.2 210,010.00
NBTB NBT Bancorp Inc. 61.3 1,724.33
NMIH NMI Holdings, Inc. Class A 60.1 1,410.44
NTB Bank of N.T. Butterfield & Son Lim 74.5 2,866.19
PBCT People’s United Financial, Inc. 65.7 6,359.14
PNC PNC Financial Services Group, Inc. 71.0 65,889.10
PNFP Pinnacle Financial Partners, Inc. 65.4 4,925.78
RNST Renasant Corporation 65.1 2,239.59
SFBS ServisFirst Bancshares Inc 72.1 2,246.75
TSC TriState Capital Holdings, Inc. 66.4 839.52
WSFS WSFS Financial Corporation 68.3 1,585.42
Health Care
LH Laboratory Corporation of Americ 63.9 18,318.60
LMAT LeMaitre Vascular, Inc. 65.5 710.56
MASI Masimo Corporation 61.1 5,688.62
NEOG Neogen Corporation 62.0 4,316.53
NKTR Nektar Therapeutics 71.3 10,229.10
SUPN Supernus Pharmaceuticals, Inc. 72.5 2,271.31
TVTY Tivity Health, Inc. 60.1 1,346.24
ZBH Zimmer Biomet Holdings, Inc. 63.7 24,916.90
AXL American Axle & Manufacturing 68.9 1,813.78
BAH Booz Allen Hamilton Holding Cor 60.3 6,974.98
BLD TopBuild Corp. 68.8 2,587.46
BMCH BMC Stock Holdings, Inc. 69.9 1,423.73
CC Chemours Co. 78.1 7,828.93
DLX Deluxe Corporation 60.2 2,787.79
FAST Fastenal Company 76.4 16,453.70
FIX Comfort Systems USA, Inc. 68.2 2,042.89
FWRD Forward Air Corporation 75.2 1,833.73
GBX Greenbrier Companies, Inc. 65.9 1,849.37
GNRC Generac Holdings Inc. 75.0 3,341.48
HEI.A HEICO Corporation Class A 69.1 8,775.83
HII Huntington Ingalls Industries, Inc. 69.5 10,419.70
HXL Hexcel Corporation 65.2 6,037.06
IEX IDEX Corporation 70.4 11,585.60
KAR KAR Auction Services, Inc. 66.9 8,230.57
MANT ManTech International Corp 60.2 2,460.25
MMS MAXIMUS, Inc. 64.7 4,082.97
NSC Norfolk Southern Corporation 70.1 47,918.70
PATK Patrick Industries, Inc. 80.0 1,542.31
SNDR Schneider National, Inc. Class B 70.8 4,693.97
WBC WABCO Holdings Inc. 72.7 6,356.54
WDFC WD-40 Company 60.9 2,290.27
WIRE Encore Wire Corporation 63.7 1,035.15
WM Waste Management, Inc. 63.3 38,588.80
CE Celanese Corporation Class A 75.2 15,648.80
FCX Freeport-McMoRan, Inc. 72.5 21,619.10
FMC FMC Corporation 64.8 11,555.30
IP International Paper Company 63.5 21,098.10
PKG Packaging Corporation of America 73.4 10,400.50
SCHN Schnitzer Steel Industries, Inc. 67.5 778.83
STLD Steel Dynamics, Inc. 81.7 10,305.60
AAPL Apple Inc. 77.1 1,008,830.00
ADBE Adobe Systems Incorporated 69.5 124,149.00
ADS Alliance Data Systems Corporation 66.9 12,492.10
ATHN athenahealth, Inc. 69.4 6,065.17
CSGP CoStar Group, Inc. 67.1 15,598.60
EGOV NIC Inc. 68.0 1,071.62
FTV Fortive Corp. 65.8 27,691.20
INTU Intuit Inc. 71.7 53,773.20
JKHY Jack Henry & Associates, Inc. 66.0 10,950.40
MKSI MKS Instruments, Inc. 77.0 5,007.90
NVDA NVIDIA Corporation 79.0 155,465.00
PAYX Paychex, Inc. 67.4 25,546.40
TSS Total System Services, Inc. 65.4 17,163.70
TXN Texas Instruments Incorporated 72.5 106,883.00
VEEV Veeva Systems Inc Class A 69.7 12,004.30
VSM Versum Materials, Inc. 65.7 4,008.23
*Market Cap in millions of USD. Source: MarketGrader Research.

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