The Quality factor refers to a company’s financial strength, profitability and the level of skill demonstrated by the management team. In most cases, higher-quality companies offer more upside potential than their lower-quality peers.
The Zen High Quality Factor Trading Strategy looks for companies that have wide moats, durable earnings and dividend growth, manageable debt loads, growing market share, and skillful managers. From this subset of companies, it then looks for those that are trading at no more than 110% of fair value.
The Screening Algorithm
This factor trading strategy begins with a universe of 6,000 stocks of all sizes, industries, and geographical locations, the algorithm selects the highest quality companies based on the metrics described above. But it doesn’t stop there. It then applies a second filter that only allows companies that are not too far above their fair value. These companies tend to trade at premium prices, and this algorithm allows for that, but it places a limit in order to avoid over-paying.
We run the screening algorithm every four weeks, and it produces a list of 10-15 candidates for further consideration. We then look at each candidate and eliminate any that have made it through by virtue of bogus numbers, lack of trading volume, or rumors of accounting irregularities or solvency risk.
The final list of stocks that make it into the model portfolio consists of 5-7 thoroughly vetted names. These finalists tend to be smaller than average in size, and younger than average in age. But there are also names that are blue chip companies that have temporarily fallen out of favor, and might be poised for a significant rebound.
Highlights
- 29.2% return in 2020
- 71% win ratio (win means beat the market)
- Average return per year from 2000-2020 of 19.6%
- Average market return per year was 6.1%
- Beat the market by 13.5% per year on average
$55/month $550/year