How HX Research Uses Quantitative Analysis

In the last couple of issues of HX Daily, we have been talking about the legacy of the greatest money manager of all time – Jim Simons.

Simons has what we (and most) consider the best track record of any money manager ever, and you can read our thoughts about him and his legacy here.

We also wrote here about how we began incorporating data analysis into our process as a money manager.

In the last hedge fund where I was the Managing Partner – 360 Global Capital – we built a robust software platform that we put "on top" of our fundamental stock picks. The software engineer who built that for me is my best friend of the last forty years and my business partner here at HX Research.

When I started in the newsletter business a half-decade ago, my firm asked me – "Would you be interested in doing a TRADING publication?"

Trading had always been a big part of our process at my hedge funds and, through time, became a large contributor to our returns. Those strategies, however, were long-term investing strategies, and we used our trading to add to returns and manage risk.

When they first asked, I had to think about it for a week or so. How could we extract our very successful trading strategies – used on top of our fundamental stock picks – into a stand-alone TRADING strategy?

It took me a week of thinking, but the more I thought about it, the more I realized that – wow – our trading methodologies could create a fantastic stand-alone strategy.

As a result, the strategy behind our HX Trader publication was created!

We are proud of all of our publications but particularly proud of this one and its long-term track record.

At my prior firm, it had 281 recommendations across five years with an over 78% positive hit rate and outperformed the S&P 500. 

More impressively, in the terrible stock market year 2022, it had a 74% positive hit rate and produced a +8.3% positive return with ONLY long positions. This was in a year where the S&P 500 was down nearly -20% and the NASDAQ Composite Index was -33%.

The KEY to this strategy is its reliance on DATA!

If you have subscribed to the product or read one of the reports, you will see that we follow the same formula for most of the recommendations.

At a high level – we are looking for "winner" stocks that are "winner" companies but have recently become oversold and begun to recover.

There is a lot in that sentence! What does each of those statements mean?

Let's review a recent example where we produced a +7% return in just eight days. That is an incredible +318% annualized return!

The company was Live Nation Entertainment, Inc. (NYSE: LYV), and you can read the original report here.

We know the company well as we have been an investor (on and off) since its inception twenty-five years ago and also happen to have other businesses in the music industry.

Let’s go back to the DATA…

What is a “winner” stock? 

One that has gone up a lot. This shows us that the stock market has significant demand for the shares, and eager buyers will likely meet any stumbles.

Here is the long-term price chart on LYV…

Now, "winner" stocks are not always companies that have performed well. There are lots of stocks that work but aren't companies that have executed. That is fine, but not what we seek with our strategy.

For us, "winner" companies have high growth, beat expectations, and see rising earnings estimates.

Here is all that data for LYV…

The company has quadrupled revenue and cash flow (as measured by "EBITDA) in the last decade.

Other than the COVID period (when they had to shut down their business), they have beat analyst expectations 90%+ of the time.

Finally, expectations for their cash flow (the blue is EBITDA) have risen consistently.

The DATA shows us that this has been a "winner" stock and also a "winner" company.

Finally, we are looking for the stock to have been oversold but begin to recover. We measure that by looking at the "relative strength index" or "RSI."

Here is a more recent stock chart with the RSI at the bottom..

The RSI DATA was textbook for what we are looking for in ideas in this strategy.

Again, you can read the note here and learn "why" the stock was down and why we thought it would recover.

Our point, however, is that DATA entirely drove our strategy.

If this stock had not checked every one of the DATA “boxes” we look for in an HX Trader idea, we would not have recommended the idea.

The DATA is where we begin! We will not do it if the data doesn't support the idea.

How did it end up? 

We already told you that we made a solid return very quickly, but here is the chart…

We recommended the stock on April 25 at $88.49 and sold it on May 3 for $94.66. This is EXACTLY how this strategy is supposed to work!

There are many valid ways to make money in the stock market and many factors that can be used to make investment and trading decisions.

For us at HX Research – just like Jim Simons – it is always the DATA that drives the core of the process.

What DATA do you use in your investment process? Please send us your thoughts via email at [email protected] or in the comments section on our website.

Check out Enrique Abeyta’s conversation with Herb Greenberg of Wall Street Beats on the HX Podcast. 

Herb started out writing the Business Insider column at the San Francisco Chronicle, and after going online at TheStreet and then MarketWatch, founded "Wall Street Beats". He brings together some of Wall Street's most respected and accomplished minds to share their strategies on how to identify and act on investment opportunities within today's complex global markets. Besides a humorous Enrique Abeyta impression, Herb also offers a wealth of thoughtful, level-headed insights, from learning from failures to finding your "sleep at night" portfolio!