Sunday, August 11, 2013

Deconstructing 10 Years of Apple Trades

Earlier this week, I read over my Apple post from last weekend and decided that just about all of the information was basically useless.
And my first thought as I started writing this post was to explain in detail what I thought was wrong with it.

But on second thought, I don't really want to write a post like that, and I'm pretty sure nobody wants to read a post like that. 

What's the point?

Instead, let's take the small amount of information that actually is valuable, deconstruct it a little bit, add a few new things, and see if we can make it more useful.  

1). Total # of weeks (5 trades): 432
  • What number/percentage of those weeks resulted in either positive or negative returns?
  • # of weeks with positive returns: 248 (57.41%)
  • # of weeks with negative returns: 184 (42.59%)
  • One thing to keep in mind: I'm using a minimum required rate of return of +12% annually (+0.22% weekly), so positive returns are defined as >0.22% weekly, and negative returns as <0.22% weekly.

2). Average Weekly Trade Returns: +1.08% 
  • +465.73% total return / 432 weeks = +1.08%

3). Average Weekly S&P 500 Returns: +0.20% 
  • +86.10% total return / 432 weeks = +0.20%

4). Average Weekly Excess Returns: +0.88%
  • +1.08% - +0.20% = +0.88%
  • As you can see, I subtract the weekly S&P 500 Index returns from my trade returns to determine my weekly excess returns. I could certainly use the risk-free rate as a benchmark instead of the index, but this is not a decision between buying Apple stock or a 10-year US bond. On top of that, I think using the index raises the bar considerably.

5). Cumulative Gains %: +894.47% 
  • What the huh? This is the useless information I was talking about at the start. But actually, it just needs a little bit of work.
  • Our average positive weekly excess return is +894.47% / 248 = +3.61%
  • Adjusting for the probability of a positive weekly return vs. a negative weekly return: 57.41% * +3.61% = +2.07%

6). Cumulative Losses %: -514.16%
  • Average weekly excess negative return: -514.16% / 184 = -2.80% 
  • Adjusting for probabilities: 42.59% * -2.80% = -1.19%

7). Average Weekly Excess Returns: +0.88%
  • +2.07% + -1.19% = +0.88%
  • I could call this 4a since we're back at the results calculated in step 4 above, but I think we've found some additional information that is very useful by adding steps 5 and 6

Before we get to the Omega Ratio, let's take a quick look at risk. I evaluate the risk to a position with 3 numbers (the following numbers, without digging into the equations, are my current calculations):
  • Value at Risk (VaR): -10.10%
  • Maximum Actual/Historical Drawdown: -19.43% (the week of 1.22.08)
  • my Volatility-Based Trailing Stop: -12.95% (Apple closed Friday at $454.45, and my new stop for the coming week is $395.62, so ($454.45 - $395.62) / $454.45 = 12.95%.
I'll generally take the middle number of the 3 as the best estimate of my risk. 

In Apple's case, that would be my stop. 

But for a stock with a limited history/limited data set like TripAdvisor (TRIP), which has the following set of calculations:
  • Value at Risk (VaR): -10.71%
  • Maximum Actual/Historical Drawdown: -6.93% (the week of 4.1.2013)
  • my Volatility-Based Trailing Stop: -19.79% (($80.94 - $64.92) / $80.94)
I'd pay more attention to the VaR calculation.

Okay, so back to the... 

8). Omega Ratio: 1.74 
  • +2.07% / -1.19% (absolute value) = 1.74
  • Is that good or bad? It's good, but we obviously need some context here.
I rank all of the stocks in the S&P 500 by several ratios (Omega, Sharpe, Sortino, Upside Potential, etc.), and I like the Omega Ratio in particular because it factors all of the specific returns into it's calculations. It does not assume anything. 

So how does Apple rank?

This is my current Top 10 (by Omega Ratio):

1. TripAdvisor (TRIP): 2.74
2. LyondellBasell (LYB): 1.88
3. Apple (AAPL): 1.74
4. Marathon Petroleum (MPC): 1.70
5. Mastercard (MA): 1.63
6. NetFlix (NFLX): 1.63
7. Intuitive Surgical (ISRG): 1.59
8. Precision Castparts (PCP): 1.57
9. (PCLN): 1.52
10. Discover Financial Services (DFS): 1.51

FYI - I planned to include a table with all of the Average Weekly Positive and Negative Returns, Probabilities, and resulting Omega Ratios... but it wouldn't fit.

Alright, so if the idea was to make this information more useful, then how are we going to use it?

My first thought, with 20 weeks left in 2013, is to project, based on the numbers we've calculated above, how much a share of Apple will cost at the end of 2013. 

I never do this kind of thing (until right now apparently), and I generally don't like predictions of any kind, so I'm going to call this a falsifiable hypothesis:
  • The closing price Friday was $454.45, and ((1+0.0088)^20)-1) = +19.12%, so $454.45 plus an additional 19.12% = $541.35.

Yes, I realize that new information will render that number useless a week from now. The irony is not lost on me. But this is still fun.

Where do you think Apple will be at the end of 2013? 

Or at the end of August for that matter?

Disclaimer: I currently own shares of LyondellBasell, Apple, Mastercard, NetFlix, and Precision Castparts.   

Sunday, August 4, 2013

Apple (AAPL)

New BUY signal the week of 7.29.13 (Friday) at $462.54. My initial stop is $393.59, so my risk (R)/share is $68.95 (14.91%).

That probably seems like a very wide stop, but my Value at Risk (VaR) calculation (at a 99% confidence level) is -10.10% ($46.74), and my Worst Actual/Historical Weekly Drawdown is -19.43% ($89.87), so 14.91% ($68.95) actually sounds about right.

At least to me it does.

History (beginning in 2003):
Winning Trades: 3 | 75.0% | +$203.20/share avg.
Losing Trades: 1 | 25.0% | -$12.10/share avg.
Average Trade: +274.8% | +$149.38/share | Reward-to-Risk (R): +11.14
Compound Annual Growth Rate (CAGR): +55.0%
Sortino Ratio (annualized): +2.36
Omega Ratio: 1.74 

Sortino and Omega Ratio calculations:
Total # of weeks (4 trades): 431 
Mean Trade Returns (weekly): +1.08%
Mean S&P 500 Returns (weekly): +0.20%
Excess Trade Returns (weekly): +0.88%
Downside Deviation (weekly): +2.70%
Sortino Ratio (calculation): +2.36
Cumulative Gains %: +894.47%
Cumulative Losses %: -514.16%
Omega Ratio (calculation): 1.74

The Best Bang For Your Buck

In the General Merchandise Stores industry of the Consumer Goods sector is...

...either Dollar General (DG) or Dollar Tree (DLTR).

You see, if we rank the stocks using the Sortino Ratio...

RankSymbolCompanyAverage Weekly Excess Return %Downside Deviation %Sortino Ratio
1 DG Dollar General+0.28%1.73%+0.1603
2 DLTR Dollar Tree+0.34%2.80%+0.1218
3 FDO Family Dollar Stores+0.15%2.74%+0.0538
4 TGT Target Corp.-0.07%1.66%-0.0408
5 KSS Kohl's Corp.-0.34%2.12%-0.1606

...Dollar General comes out on top.

But if we rank them by Omega Ratio...

RankSymbolCompanyCumulative Gains %Cumulative Losses %Omega Ratio
1 DLTR Dollar Tree607.38%-470.63%1.29
2 DG Dollar General198.56%-158.59%1.25
3 FDO Family Dollar Stores439.77%-395.86%1.11
4 TGT Target Corp.325.82%-350.26%0.93
5 KSS Kohl's Corp.275.55%-370.33%0.74

...then Dollar Tree is the winner.

How are we going to break the tie?

Let's see what happens when we rank them by Upside Potential Ratio:

RankSymbolCompanyUpside Deviation %Downside Deviation %Upside Potential Ratio
1 DG Dollar General1.38%1.98%0.6979
2 DLTR Dollar Tree1.51%2.59%0.5852
3 FDO Family Dollar Stores1.48%2.69%0.5476
4 TGT Target Corp.0.90%1.80%0.5026
5 KSS Kohl's Corp.0.99%2.38%0.4167

It looks like Dollar General is the best bang for your buck in the General Merchandise Stores industry after all.

Just as a side note: my Downside Deviation % calculations differ between the Sortino and Upside Potential Ratios because the Upside Potential Ratio takes the Upside (>0.22% required weekly return) and Downside (<0.22% required weekly return) Deviation %'s and multiplies them by their respective probabilities.

Sortino uses the full Downside Deviation % (all returns below the required +0.22% weekly return).

Disclaimer: I do not own any of the stocks mentioned in this post nor do I intend to open any positions in any of these stocks in the next 72 hours.