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Second Week, Second Algorithm (I'm getting worse)
EL
posted Feb 1, 2019

Hi guys! As a continuation of my journey here, I'm just about done week 2 on Q and have decided to post what I came up with this week, in hopes you smart folks will tell me how bad this is, and where I can improve for my next one (or improve on this one).

The goal in this one was to use Earnings Surprises as well as FCF/Sh, and long anything in the top 2 quantiles and short the bottom 3. This seemed to indicate some alpha in Alphalens (unless I read my charts completely wrong). Also while on the topic of Alphalens, if any kind soul would be willing to take a peek at my pipeline through alphalens, and let me know if I interpreted the charts accurately. Basically since quantile 4 and 5 seemed to outperform the rest consistently in the mean return charts, as well as the mean return by quantile, I thought that would make sense. My seemingly low total return tells me that I might have interpreted it wrong.... I tried to clarify with the tutorials but the interpretation of the charts still seems a bit foggy to me.

I used only a few sectors as well, as after trial and error this combination gave me the highest alpha while bringing my beta as close to 0 as I could get it.

I am still using simple ranking and portfolio weighting, and my goal for week 3 is to learn how to use the portfolio optimizer, so hopefully that will improve my algo's moving forward.

Thanks to all who take the time :)

2 responses
Joakim Arvidsson (Cream Mongoose)
Feb 1, 2019

Hi EL,

Also while on the topic of Alphalens, if any kind soul would be
willing to take a peek at my pipeline through alphalens, and let me
know if I interpreted the charts accurately.

Did you want to attach your Alphalens (AL) notebook as well for feedback comments?

Regarding your first factor, if you only use FCF per share on its own, I believe the factor would tend to favour companies with fewer shares outstanding (or perhaps stocks that do fewer stock splits), which I'm not sure is desired or if that was your intention. Maybe try to turn it into some sort of ratio instead? One of the below maybe?

  • fcf per share / price per share
  • fcf per share / book value per share
  • fcf per share / EV per share
EL
Feb 1, 2019

Ah, great idea Joakim..... I will try one of the ratios and see how that improves the pipeline. And d'oh here is the alphalens notebook. Thanks!

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