Subject: Non-Mag7 screen
Everybody knows that if you weren't in the S&P 500 in the last several years, and particularly in the very largest stocks that dominated it, then you've probably been doing worse for it.

A link on the Berkshire board mentions a previous index-tracker advocate saying pleasant things about the S&P Equal Weight index, which I have long been a fan of, on the basis of too much concentration lately.
This post https://www.shrewdm.com/MB?pid... ...pointing to this blog article... https://stansberryresearch.com...


So I was thinking, it is still possible to do OK among the very big, but not gigantic stocks? Or will you keep getting your head handed to you if you avoid the few supergigacaps?

Here's a screen. Value Line, since that's what I have handy, though it shouldn't matter TOO much other than the usual comments about different sources of ROE figures.

I started with the S&P 500 stocks. My database doesn't have that directly, so I used the 500 largest market cap US-domiciled stocks as a very close proxy.
Of those, take the smallest 490 by market cap.
Of those, take top 10 by ROE. That's it.

The ROE figure I used is Value Line's "Return on Shareholders Equity", which is updated only annually, so though I looked at a monthly trade cycle, the turnover is very low. One stock swap per month. (you can cut that down to 0.75 swaps per month with top 10 HTD 12, which is less work and performs better if you assume trading costs). These are all S&P 500 stocks, so trading costs are close to zero.

The screen beat the S&P by 6.6%/year without trading costs 1997-2024, or by 5.5%/year if you use data from 2003 (gigacaps were a notoriously bad idea in the tech bear, which skews the result).

And more notably, consider the performance since the top 10 really pulled away from the pack around 2015 or so: Of the last 132 monthly-cycle rolling years in my test starting with calendar 2013, the screen beat the S&P in all but 9 rolling years. In backtest, anyway. CAGR advantage in those years a rather implausible 7.6%/year. I would not believe a result like that can be achieved, but it's certainly a good omen.

Though all screens have issues, and in particular backtests with as few as 10 stocks, there is perhaps a general investing insight that the high ROE firms in the S&P, but outside the giants, are probably a good hunting ground.
The current picks would probably be something like this (don't ask my why I pasted 18):
KMB CLX IRM HD MA AMGN NTAP MSI GDDY FTNT SYY MMM KLAC LII ITW ORCL LMT LLY

The average ten year total return among those picks is 17.6%/year, so it isn't a screen that's picking dogs. There is still money to be made outside the Magnificents.


Possible modification: In recent years the S&P 500 contains around 25 very fine firms with essentially infinite ROEs. They make a positive current EPS with negative book value: they don't need any net assets at all in order to make money, like YUM. Unfortunately this gets naively calculated as a negative ROE, which means they never get picked by the screen sort despite having excellent overall performance. If you replace the ROE sort figure for that category of firm (ROE<0, Current EPS>0, TTM EPS>0) as reported with (say) a fixed 100% proxy ROE, they would be allowed to make the cut.

Jim