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Tortoriello's Quantitative Strategies

by John Bajkowski

Tortoriello's Quantitative Strategies Splash image

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.

  Enterprise
Value to
EBITDA
(X)
Cash
ROIC
(%)
Return
on
Equity
(%)
52-Wk
Price
Range
(%)
Share
Price
(4/16)
($)
52-Week Market
Cap
($ Mil)
Description
 
  High
($)
Low
($)
Company (Exchange: Ticker)
Constellation Energy Group (N: CEG) 1.1 20.9 91.6 90 36.98 38.73 21.40 7,436 energy servs
Clearwater Paper Corp (N: CLW) 2.8 40.1 63.2 89 54.31 59.90 9.66 623 tissue & paper prods
KapStone Paper & Pkg Co. (N: KS) 3.9 36.6 29.9 97 12.79 13.10 2.50 581 kraft & carton board
Boise Inc. (N: BZ) 4.3 27.1 29.0 95 7.09 7.41 0.61 599 paper & packaging
Buckeye Technologies Inc. (N: BKI) 5.1 14.8 40.1 92 14.34 15.31 3.00 556 specialty fiber prods
P.H. Glatfelter Company (N: GLT) 5.6 18.4 29.6 99 15.00 15.05 6.40 686 specialty paper prods
Ticketmaster Entertainment (M: TKTM) 6.0 13.2 19.5 96 15.40 15.89 3.42 884 ticket sales
Advanced Micro Devices (N: AMD) 6.1 13.5 953.2 94 9.81 10.24 3.17 6,596 semiconductors
Allegiant Travel Company (M: ALGT) 6.6 31.8 46.5 90 56.56 59.04 33.20 1,126 leisure travel
Aeropostale, Inc. (N: ARO) 6.6 64.6 53.7 94 30.59 31.26 19.10 2,882 casual apparel
Innophos Holdings, Inc. (M: IPHS) 6.9 28.5 22.0 91 28.33 29.88 12.98 606 phosphates
Kirkland's, Inc. (M: KIRK) 6.9 52.7 46.9 95 23.85 24.76 5.43 472 home décor
Amtrust Financial Services (M: AFSI) 6.9 21.1 20.8 86 13.92 14.84 8.34 826 insurance
CEC Entertainment, Inc. (N: CEC) 6.9 15.2 36.0 96 39.25 39.87 24.69 871 dining centers
Freeport-McMoRan Cpr & Gld (N: FCX) 7.1 18.2 55.9 82 81.18 90.55 38.00 34,953 copper & gold mining
Endo Pharmaceuticals (M: ENDP) 7.2 17.8 20.9 82 23.22 24.85 15.75 2,723 pharmaceuticals
Big Lots, Inc. (N: BIG) 7.3 31.3 22.6 98 39.59 40.05 19.49 3,183 closeout retailer
Raytheon Company (N: RTN) 7.4 19.6 20.4 97 58.32 58.87 40.75 22,108 defense contractor
Amedisys, Inc. (M: AMED) 7.6 22.7 20.4 90 60.52 64.28 28.32 1,712 home health servs
Lubrizol Corporation (N: LZ) 7.6 23.5 27.6 90 90.63 96.48 36.46 6,171 specialty chemicals
Neustar, Inc (N: NSR) 7.8 29.1 27.3 95 26.32 26.73 18.27 1,960 phone call routing
Gymboree Corporation (M: GYMB) 7.8 31.2 25.4 88 52.23 55.27 29.00 1,538 kids' apparel & play
EZCORP, Inc. (M: EZPW) 7.8 16.0 19.5 93 21.39 22.23 10.00 1,042 credit servs
Deckers Outdoor Corp. (M: DECK) 7.8 35.0 27.2 91 136.00 144.22 48.70 1,751 footwear
Gap Inc., The (N: GPS) 7.9 32.6 23.0 96 25.00 25.40 14.38 16,686 apparel retailer
LHC Group, Inc. (M: LHCG) 7.9 17.7 37.3 94 35.57 36.52 19.79 662 health care servs
Sanderson Farms, Inc. (M: SAFM) 8.0 28.0 25.2 95 58.37 59.43 36.09 1,190 poultry processing

 

Field Operator Factor Compare to:
Exchange Not Equal Over the counter  
And ADR/ADS Stock Is False  
And Country Contains United States
And Industry Not Equal Misc. Financial Services
And Industry Not Equal Real Estate Operations
And Price > 2
And Market Cap Q1 >= 422
And - FC EV to EBITDA > 0
And - FC EV to EBITDA <= 8
And - FC Cash ROIC >= 12
And Return on equity 12m >= 18
And -FC Alpha 52-WK Price % >= 82
Custom Fields for Tortoriello Alpha Screen
-FC EBITDA
[Pre-tax income 12m] + IIF(IsFieldNull([Interest expense 12m])=0,0,[Interest expense 12m]) + IIF(IsFieldNull([Depreciation 12M])=0,0,[Depreciation 12M])
-FC Enterprise Value
[Market Cap Q1]+[Long-term debt Q1]+[Preferred stock Q1]+[Short-term debt Q1]-[Cash Q1]
- FC EV to EBITDA
IIF([-FC Enterprise Value] > 0, IIF([-FC EBITDA] > 0, [-FC Enterprise Value] / [-FC EBITDA],null),null)
-FC Alpha Invested Cap
[Equity (common) Q1]+ [Long-term debt Q1]+[Preferred stock Q1]
-FC Alpha Free Cash Flow
[Cash from operations 12m] - IIF(IsFieldNull([Capital expenditures 12m])=0,0,[Capital expenditures 12m])
- FC Cash ROIC
IIF([-FC Alpha Free Cash Flow] > 0, IIF([-FC Alpha Invested Cap] > 0, ([-FC Alpha Free Cash Flow]/[-FC Alpha Invested Cap])*100,null),null)
-FC Alpha 52-WK Price %
([Price]-[Price--low 52 week])/([Price--high 52 week]-[Price--low 52 week])*100
John Bajkowski is president of AAII.


Discussion

Gregory from TX posted over 3 years ago:

In his book he uses a number of screening strategies where he combines 2 and 3 factors and then backtests the results. The strategy with the lowest Max Loss and a High Return 21.3% was a simple 2 factor model of EBIT/Invested Capital >35% & FCF/Mkt Cap > 7%.

It would be nice if AAII included at least this single strategy with the other Stock Screens that it provided on-going results on.

Greg Morgan


James from TN posted over 3 years ago:

Greg's idea sounds good to me. Quantatative strategies require less oversight on an individual company basis, but probably require more frequent rebalancing of the portfolio. Since the quantative screen here is primarily based on fundamentals, it might be possible to rebalance quarterly and achieve pretty good results. I have not read the book yet.


Norman from RI posted over 3 years ago:

Tortoriello's quantitative strategy results should be added to the stock screens' roster.


Greg from TX posted over 2 years ago:

Would it be possible to add this screen to the permanent stock screens that AAII tracks and runs.


Dave from CO posted over 2 years ago:

How long does AAII wait before one of their reviewed method strategists makes the standard list of the AAII Stock Screening tool? This one, Tortoriello, seems like a good candidate.


Charles from IL posted over 2 years ago:

Dave, Thanks for the request to the add Tortoriello to Stock Investor Pro. Adding new screens is a programming issue, but we are monitoring requests to add the screen to SI Pro. -Charles Rotblut


Vaidy Bala from AB posted about 7 hours ago:

One issue that is noted is what is the ultimate return over a period and how does that value compare with benchmark. What is the standard deviation? The quantitative method is suitable for computer to do the number crunching. Any comments?


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