Portfolio Design

Advanced concepts in stock investment portfolio design.  Fundamentals, technical analysis and many other related topics are discussed.

Capital Strength Stock Portfolio Part 1 - The Custom Stock Universe

 

This is Part 1 of a tutorial demonstrating how to design a stock portfolio based on capital strength, a strategy that chooses companies with strong balance sheets, a strategy that may hold up well in these uncertain times.This strategy screens for stocks with large cash/cash-equivalent holdings, low debt/mktcap ratio, and high return on equity.

Stock analysis tools provided by Portfolio123.


When starting a new portfolio design, a good place to get ideas is from Exchange Traded Funds (ETFs). Part 1 of this tutorial begins by capturing the stock screening rules for the First Trust Capital Strength ETF (Symbol: FTCS). Part 2 and 3 will follow up with a portfolio design that implements the FTCS reconstitution, rebalancing, and industry weighting rules.

Screenshot of First Trust Capital Strength ETF (Symbol: FTCS) fund summary

As you can see from the screenshot above, there are a lot of rules to be implemented. But fear not, Portfolio123 is exactly the right platform for emulating this ETF.

Paraphrasing Matt Damon in the movie "The Martian":  you solve one problem at a time, the first, then the next, and the next. When you solve enough problems you get to go home.

Lets tackle each rule one at a time. Start by creating a new custom stock universe. The custom stock universe is where most of the stock screening will be performed.  (Note: this custom universe is publicly available here: Tutorial: Capital Strength Universe.)

Select Custom Universes from the TOOLS pull-down menu.

Selecting a custom universe from the Portfolio123 DATA drop-down menu

Then select New -> Stock Universe as shown below.

Creating a new stock universe

First requirement:  "From the stocks in the NASDAQ US Benchmark Index"

The NASDAQ US Benchmark index consists of U.S. stocks, not necessarily from the NASDAQ Exchange alone. Therefore select the PRussell1000 from the Start Universe pull-down menu as shown below. The PRussell1000 is the Portfolio123 version of the Russell1000, the top 1000 U.S. stocks by MktCap. 

Selecting Russell1000 as the starting stock universe

Then rules are added in the rows beneath. Each rule is processed in a serial fashion top-to-bottom, screening the stocks, and causing the number of stocks meeting the overall criteria to be reduced.

Second Requirement: "the largest 500 companies with a minimum three-month average daily dollar trading volume of $5 million are selected."

This requirement is satisfied using the rule: AvgDailyTot(63)>5000000. AvgDailyTot is a Portfolio123 function that calculates the average daily trading volume. Three months is represented by 63 trading days. Enter the rule into the text box as shown below, then click on ADD FREE FORM RULE.

Entering the first rule then adding a new free form rule

Third Requirement:  "the largest 500 companies"

This requirement is satisfied using the rule: FOrder("MktCap",#Previous,#DESC)<=500. FOrder sorts the stock universe based on a set criteria, in this case "MktCap". The stock universe from the previous rule (#Previous) is arranged in descending (#DESC) order whereupon the stocks are tested to see if they are among the top 500. Enter this rule into the blank rule text box and then click on ADD FREE FORM RULE.

Fourth Requirement: "at least $1 billion in cash or short term investments"

This requirement is satisfied using the rule: CashEquivQ>1000. The rule is interpreted as "Cash and Equivalents must be greater than $1000(million)". Cash and Equivalents includes short term investments. Enter this rule into the blank rule text box and then click on ADD FREE FORM RULE.

Fifth Requirement: "a long term debt to market cap ratio less than 30%"

This requirement is satisfied using the rule: DbtLTQ/MktCap<0.3. The rule is interpreted as "Long Term Debt divided by MktCap is less than 0.3". Enter this rule into the blank rule text box and then click on ADD FREE FORM RULE.

Sixth Requirement: "a return on equity greater than 15%"

This requirement is satisfied using the rule: ROE%TTM>15. The rule is interpreted as "Return On Equity Trailing Twelve Months (TTM) is greater than 15%".  Enter this rule into the blank rule text box and then click on SAVE. The custom universe is now complete.

Amazingly, all of the screening requirements were satisfied using Portfolio123 tools. The custom universe should be the same as shown below.

Screenshot of the completed custom stock universe for the capital strength stock portfolio

Part 1 is now complete. Stay tuned for Part 2 of this tutorial, which will construct the ranking system for this portfolio. The ranking system will sort the stocks based on lowest combined 3 month and 1 year volatility. Part 3 will put together the complete portfolio, based on the reconstitution, rebalancing, and industry weight rules used by the First Trust Capital Strength ETF.

Stock analysis tools provided by Portfolio123.