Tortoriello's Quantitative Strategies

Richard Tortoriello explores a quantitative approach to investing in his book “Quantitative Strategies for Achieving Alpha” (McGraw-Hill, 2009). Tortoriello felt that most popular books by investment gurus explored the qualitative side of picking stocks, while quantitative academic studies were not always practical or useful. Tortoriello outlines the process he employed and presents four of the more successful strategies in this issue. He lays out a screen that investors can use that covers the basics of valuation, cash flow, profitability and price momentum. This issue’s First Cut applies that screen using AAII’s stock screening and fundamental database, Stock Investor Pro.

The starting universe of 1,943 stocks for this issue’s First Cut consisted of domestic, exchange-listed companies with a share price above two dollars and a market cap above $422 million—mirroring the starting universe Tortoriello used for his testing.

Tortoriello used a cumulative screening approach when building multi-factor portfolios for his test. In a cumulative approach, the first factor would have the greatest impact on the resulting portfolio, with successive factors having less and less influence. Fortunately, Tortoriello provides a standard intersection set of filtering variables that can be used by most screening programs in his AAII Journal article on page 23. After establishing the starting universe, the First Cut looked for stocks with a ratio of enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) of eight or less, a cash ROIC (free cash flow to invested capital) of 12% or greater, return on equity of 18% or greater and a 52-week price range of 82% or greater. These variables are defined and explained in Tortoriello’s main article in this issue. Twenty-seven companies passed the all the filters, and they are presented below, ranked in ascending order by enterprise value to EBITDA. The First Cut listing also presents the 52-week high and low to underscore the range of prices for these stocks over the last year as well as the market cap to judge the size of these firms.

Discussion