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April 2024 · 5 min read

Building a value strategy with Xplore Stocks


In the Xplore Stocks glossary post we give brief descriptions of all the metrics we surface to our users so they can build their own investment strategies. We now illustrate the construction of a simple value strategy using Xplore Stocks and show all steps involved in its construction.

As we have discussed in a previous value factor post, over the last decade from 2010-2020 the value factor has had a tough time and struggled to keep pace with the S+P 500, which was driven by a strong quantitative easing tailwind and a tech/growth trend. However, there has been a pullback in the markets with the new inflationary environment in 2022. It has been mentioned by a large cohort of market commentators that value stocks and the value factor, in particular, are primed for a strong decade ahead. This has already been evident in 2021 and 2022 where the value factor has performed very well, as referenced by Blackrocks Andrew Ang.

Value and min vol strategies are made for these times, with value strategies historically outperforming growth in periods of high inflation, as evidenced by factor returns we analyzed going back to the 1920s.

So with all that said, let's walk through from start to finish an example of how to use Xplore Stocks to build your very own value investing strategy.

Choosing our universe and sectors

Every user has a choice as to what stocks and sectors to include at the start of their strategy research. These can be personalized to your investing thesis however the results of your strategy, in terms of risk and return and also robustness, will depend on this choice. If you narrow down your choices too much and then apply filters that are a bit too strict, you may end up with no strategy as no stocks satisfied all your criteria. For initial research, we prefer to choose all market caps and all sectors and Xplore defaults to this for our users.

What universe do we want to use for the construction of our value strategy. We default to using all market caps and all sectors.
Which value factors will we pick

Under the Filters section, users can click "Add Factors" to start accessing all our available factors. Given we are designing a specific value strategy we are going to focus on only on the value group for this article and ignore the other categories such as quality and technicals.

The full list of value metrics we can choose from for our value strategy.

We want to design a generic value strategy and so for that purpose, we keep our choices of filters simple. This will hopefully ensure that we are able to generate a portfolio for our strategy (i.e that stocks can pass all these filters) every day back through our backtest. Percentiles are a nice, flexible way to use filters. If you want to apply a filtering so you only incorporate the top half of all stocks for that filter, you can simply choose greater than and then tick the percentile box. For our strategy we choose:

  • EVEBITDA for all stocks in bottom half, less than the 50th percentile
  • Return on invested capital for all stocks in the top half
  • Free cash flow to equity for all stocks in the top half
We can choose up to five metrics but we choose three for this strategy.
How do we want to sort our stocks

Once our strategy has been designed with all filters in place, it is time for to sort and no strategy can be completed without at least one sort chosen. Some classic rankings we like to apply are momentum, volatility and liquidity but users can experiment with what works best for them. The rankings have a default ordering in-built but users are again free to modify for their specific use cases. Xplore defaults to

  • Momentum defaulted to the HIGHEST sort, stocks with the highest momentum are to be included in your portfolio
  • Volatility defaulted to LOWEST sort, stocks with the lowest volatility are to be included in your portfolio
  • Liquidity defaulted to HIGHEST sort, stocks with the highest liquidity are to be included in your portfolio

For this value strategy, we chose 6-month momentum, volatility, and liquidity as our sorts.

How do we want to sort our final list of stocks. Choose from momentum, volatility and liquidity sorts..
Strategy analysis tab and results

After you Save your strategy and click Run Analysis you will automatically be taken to the Analysis page, which contains the headline results of your strategy and compares it to the S&P 500 benchmark. For background on most of these metrics shown in under the backtest overview tab, users can check out this post. While you are looking at and analyzing the analysis results, a tearsheet will also be running in the background. You will be notified when the tearsheet pdf is ready, which is also downloadable.

Analysis headline results for your strategy showing all your return, risk and drawdown metrics.
Analyzing your strategy tearsheet

Xplore Stocks also produces a tearsheet for every user for their own personal investing strategy. It covers a range of output to help users make their decision whether to invest using the strategy or go back and change some parameters and try again. It covers everything from overall risk and return results, to monthly and yearly performance, all the way to some sector breakdown at the end.

Tearsheet output for your first value strategy.

In addition to headline results, we also show you more granular data that will describe any seasonality in your investment strategy, and also its performance is broken down into yearly returns.

Breakdown of your strategy showing its seasonal monthly returns and also the returns per year.

We hope you have enjoyed this article outlining how to use Xplore Stocks to create your first value strategy.


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