Our “Quantamental” Approach

Beginning last July, every Tuesday in HX Daily, we have applied our "Quantamental" approach of stock analysis to some of the largest and most well-owned stocks in the stock market.

We have developed this approach over our three decades of active investing.

The approach combines technical analysis (“quantitative”) with financial analysis ("fundamental”).

It is a quick way to analyze the potential for a stock over the next six months.

It is not meant to substitute for a deeper analysis of a stock. It is a framework designed as a screening tool to make a quick decision about whether to continue to work on a stock.

Now that we have completed 2024, we have analyzed how the approach has performed.

Overall, the strategy has analyzed 16 stocks and made 17 recommendations.

There has been one time so far where we have updated a recommendation, going from an "AVOID" to a "BUY.” This was with NVIDIA Corporation (NASDAQ: NVDA) in November.

Here is the table showing the performance of the “BUY” recommendations…

The S&P 500 is +6.5% since we began publishing our “Quantamental” analysis notes. By comparison, our “BUY” positions are +12% on average and the median performance is +13%.

Note that this uses the S&P 500 for the whole period, so our “alpha” generation (performance versus the overall stock market) is MUCH stronger. These are some great results!

Importantly, we have also seen all but one of our positions go higher. That gives us an 88% hit rate.

At HX Research, we like to focus on high-hit-rate strategies. If you know you have a high probability of winning, you can take bigger bets and trade with more confidence. Almost 90% is pretty good.

While none of the stocks is up massively, the majority of them are up double digits.

What happened with the one stock that is down?

Our timing on Eli Lilly and Company (NYSE: LLY) was poor as the stock got crushed the day after we published. They reported a strong quarter but with some “noisy” guidance.

We knew they would report the next day, but given the company's history of beating numbers, we felt good about making the recommendation before the announcement.

We feel even BETTER about the position today. It would be our top pick amongst our existing “BUY” recommendations.

Here is the table showing the performance of the “AVOID” recommendations…

These are some very interesting results.

While the average return was even better than our "BUY" recommendations at +17%, it was entirely driven by the performance of just two stocks. Palantir Technologies Inc. (NASDAQ: PLTR) and Tesla Inc. (NASDAQ: TSLA).

The median performance is NEGATIVE, and the positive hit rate in this group of stocks was only 38%. Again, this compares to a stock market that has gone steadily higher over the period we have been publishing these analyses.

These results are precisely what we are looking for from the approach.

Again, we think the hit rate is almost as crucial as the return. Remember that we are not saying to short these stocks; simply don't buy them.

Technically, had you bought all eight of our "AVOID" stocks at an equal weighting, you would have outperformed our "BUY" stocks. It would have been a very unpleasant journey, though, and none of us want strategies that lose almost two-thirds of the time.

Did our analysis fail with PLTR and TSLA?

Absolutely not.

Like all of our trading strategies, we are focused on probability. Even with the highest probability bets, you will lose some percentage of the time.

By any measure, the performance of these two stocks has been extraordinary over this period.

It would have been nice to own them, but a low probability, high return bet isn't interesting for our approach. We understand that the net present value might still be better, but as we said before – we like high hit rates and solid returns.

Our “Quantamental” approach is performing the way it was built to perform!

Next week, we will update our thoughts on the two high performers and begin our review of the other ideas as we go into earnings season.