09-25-2021, 10:28 AM
We analyzed companies that spend the most on R&D over the past 21 years and here are
<!-- SC_OFF --><div class="md"><p>The Journal of Finance back in 2001 claimed "companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns." We took that and set screens for backtesting at a cut-off of 15% of market cap spent on R&D. This is rare for companies to do but nonetheless it happens.</p> <p>From there we took the Russell 3000 and took out the companies that don't report R&D expenses.</p> <p>Then we took out companies that had high short interest to avoid companies that analysts/funds determined were spending irresponsibly.</p> <p>Edit: I forgot, we also removed companies that had too much volatility, as measured by beta against the S&P. This weeds out some of the anomalies and smooths results.</p> <p>Most companies that remain are health care and tech, and most are smaller. Therefore, I wouldn't build an entire portfolio around this but it's a nice addition to a portfolio. I'll be adding 5 stocks into my Roth and rebalancing each quarter, which were the backtesting criteria we used for:</p> <p>- 29.1% CAGR</p> <p>- 10.3 standard deviation of results</p> <p>- 52% high CAGR for a 3-yr increment</p> <p>- 1% low CAGR for a 3-yr increment</p> <p>- Sortino of 1.33, vs S&P's 0.6; Sharpe of 0.78 vs S&P 0.47</p> <p>- 12% higher max drawdown than S&P (little bumpier ride to get alpha)</p> <p>To get this data we took FactSet data which accounts for look-ahead and survivorship biases, and backtested it from Jan. 2000 until today. We didn't want to just do a straight 2000-2021 backtest because no one will keep a strategy going for 21 years until it pays off. Therefore, to backtest, we "walked back" 3 year tests from Sept 2021 to Sept 2018, then Sept 2018 to Sept 2015, etc. This went back to 2000. From there we switched to Jan 2000 and walked back up to 2021 (Jan 2000-2003, '03 to '06, etc). Then we did this with 5 year windows (Sept. 2021 back to 2016, 2016 back to 2011, etc.) all the way to Sept. 2001, and then Jan. 2000 back up to 2020. Then 10 year- Sept 2021 back to 2011 and 2011 back to 2001, folllowed by Jan 2000 to 2010, then to 2020.We lastly wrapped it up with one max value from Jan 2000 to Sept 24 2021.</p> <p>We're going to keep doing these tests with Magic Formula, Tiny Titans, Piotroski F-score, etc on <a href="https://www.stockmixology.com">www.stockmixology.com</a>.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/ljstens22"> /u/ljstens22 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/pux3vb/we_analyzed_companies_that_spend_the_most_on_rd/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/pux3vb/we_analyzed_companies_that_spend_the_most_on_rd/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>The Journal of Finance back in 2001 claimed "companies with high R&D to equity market value (which tend to have poor past returns) earn large excess returns." We took that and set screens for backtesting at a cut-off of 15% of market cap spent on R&D. This is rare for companies to do but nonetheless it happens.</p> <p>From there we took the Russell 3000 and took out the companies that don't report R&D expenses.</p> <p>Then we took out companies that had high short interest to avoid companies that analysts/funds determined were spending irresponsibly.</p> <p>Edit: I forgot, we also removed companies that had too much volatility, as measured by beta against the S&P. This weeds out some of the anomalies and smooths results.</p> <p>Most companies that remain are health care and tech, and most are smaller. Therefore, I wouldn't build an entire portfolio around this but it's a nice addition to a portfolio. I'll be adding 5 stocks into my Roth and rebalancing each quarter, which were the backtesting criteria we used for:</p> <p>- 29.1% CAGR</p> <p>- 10.3 standard deviation of results</p> <p>- 52% high CAGR for a 3-yr increment</p> <p>- 1% low CAGR for a 3-yr increment</p> <p>- Sortino of 1.33, vs S&P's 0.6; Sharpe of 0.78 vs S&P 0.47</p> <p>- 12% higher max drawdown than S&P (little bumpier ride to get alpha)</p> <p>To get this data we took FactSet data which accounts for look-ahead and survivorship biases, and backtested it from Jan. 2000 until today. We didn't want to just do a straight 2000-2021 backtest because no one will keep a strategy going for 21 years until it pays off. Therefore, to backtest, we "walked back" 3 year tests from Sept 2021 to Sept 2018, then Sept 2018 to Sept 2015, etc. This went back to 2000. From there we switched to Jan 2000 and walked back up to 2021 (Jan 2000-2003, '03 to '06, etc). Then we did this with 5 year windows (Sept. 2021 back to 2016, 2016 back to 2011, etc.) all the way to Sept. 2001, and then Jan. 2000 back up to 2020. Then 10 year- Sept 2021 back to 2011 and 2011 back to 2001, folllowed by Jan 2000 to 2010, then to 2020.We lastly wrapped it up with one max value from Jan 2000 to Sept 24 2021.</p> <p>We're going to keep doing these tests with Magic Formula, Tiny Titans, Piotroski F-score, etc on <a href="https://www.stockmixology.com">www.stockmixology.com</a>.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/ljstens22"> /u/ljstens22 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/pux3vb/we_analyzed_companies_that_spend_the_most_on_rd/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/pux3vb/we_analyzed_companies_that_spend_the_most_on_rd/">[comments]</a></span>Kind Regards R