Investor's Business Daily, April 16th, 2007
Mid-cap growth, core and value stocks have outperformed large- and small-caps for at least the past five years.
Clear Indexes claims it's found a way to narrow the universe down to just 50 stocks and created an ETF that groups what it considers the best of the best.
Its second exchange-traded fund, Claymore/Clear Mid Cap Growth ETF, MCG is slated to launch April 26. Andrew Corn, Clear's CEO, explains his firm's strategy for finding the top mid-cap stocks.
IBD: How do you go about screening or selecting stocks for your new mid-cap ETF? What research or past history supports that these variables lead to higher returns?
Corn: We examine all stocks with growth characteristics with market capitalizations between $2 billion and $10 billion.
Our parent firm Clear Asset Management has a 25-month track record of superior returns for this asset class, but that's true active management of a far more concentrated portfolio.
Clear Indexes has utilized key factors of the multifactor model employed by its parent company for this index. Our back-testing methodology does not include "Monday morning quarterbacking" of what worked. It does not use 20-20 hindsight and is a fair process.
Our investment process involves screening every company based on the stated characteristics of mid-cap growth. From this screened list we employ our multifactor model. Last, we rank or give a report card to every stock through a proprietary set of algorithms.
Essentially, we select the 50 stocks we calculate to have the highest probability of superior performance for the published index.
IBD: What were the best performing stocks in this ETF in the past 12 months, year-to-date and/or month? What fueled their performance?
Corn: Wimm-Bill-Dann Foods WBD. Anecdotally, this is a nice play on the Russian market. Here, you are in basic and non-basic foods. It's classified as dairy products within consumer goods.
One of the things you see in several Clear indexes are global plays on emerging middle classes.
Our multifactor models are looking at key statistics. The first is most recent quarter revenue growth of 36.4% vs. a flat peer group average.
So here's a company that's exhibiting trailing 12-month operating margins just above its peer group average. That tells us they're growing faster than the industry. That tends to lead to higher valuations.
It's trailing 12-month price-to-earnings ratio is significantly higher than the industry.
The PE for the trailing 12 months is 38.58 vs. 29.22 for the industry.
One might perceive the price-to-earnings ratio is high, but when factoring in growth using the PEG ratio (price-to-earnings to growth), the company still is perhaps not yet fairly priced by the market.
The trailing 12-month PEG is 0.178 vs. its peer group ratio of 0.520.
(Disclosure: Wimm-Bill-Dann Foods is a constituent in the Clear Mid Cap Growth index, which will be licensed for the Claymore/Clear Mid Cap Growth ETF MCG and is a holding in the Clear Mid Cap Growth portfolio.
Corn is CEO of both Clear Indexes, which publishes the index and Clear Asset Management. He plans to own shares of the ETF. Additionally, Corn owns shares of Wimm-Bill-Dann Foods in his separate account holdings in the Clear Mid Cap Growth portfolio.)
IBD: How long will you keep the holdings?
Corn: This is a real differentiator for this ETF. We re-balance this index every quarter.
The models perform all of the screens, calculations and employ their ranking algorithms on every public company and ADR trading on U.S. exchanges. A firm can be in the index indefinitely or as little as one quarter.
IBD: How do you decide when to drop a stock from the portfolio?
Corn: The multifactor models seek a balance of fundamental data and valuation. So a strong company that has reached a high valuation could be dropped if strong companies that have not yet reached that level of comparable value are in the mix.
IBD: Why is the ETF equal weighted? How does this manage risk or lead offer superior performance?
Corn: Broad market indexes often use market-cap weightings. This limits the impact on the overall index of smaller companies.
Since we have chosen to use our multifactor model, we already have separated the wheat from the chaff and calculate that providing equal weight for equal impact within similarly market-capped stocks provides the best results.
Copyright 2007 Investor's Business Daily, Inc.
