A special portfolio constructed by AllianceBernstein that combines quantitative analysis and fundamental analysis has outperformed the market by 6 percentage points per year, on average, since 2004, Barron's reports. Called theĀ "Quant + Fundamentalā€ portfolio, its current components include these 6 stocks: Aramark (ARMK), Spirit AeroSystems Holdings Inc. (SPR), CVS Health Corp. (CVS), Cigna Corp. (CI), Philip Morris International Inc. (PM), and Chipotle Mexican Grill Inc. (CMG).

Quantitative stock picking can be more objective, consistent and testable than fundamental analysis, as Ann Larson, managing director of global quantitative research at Bernstein, tells Barron's. However, she notes that fundamental analysts are better at predicting changes in a business.

Key Takeaways

  • Bernstein has developed a "Quant + Fundamental" portfolio.
  • It applies quantitative screens to the top picks of analysts.
  • The portfolio has beaten the S&P 500 handily since 2004.
  • It also has done better than either stock picking method alone.

Significance For Investors

The "Quant + Fundamental" portfolio includes 10 stocks, rebalanced every 6 months, that are simultaneously among the top picks of Bernstein's analysts and highly ranked by the firm's quant models. Another criterion for inclusion is that these stocks are not held by too many institutional investors, and thus are not especially crowded.

Since 2004, stocks rated "outperform" by Bernstein's fundamental analysts have beaten the S&P 500 Index by almost 2 percentage points annually. Backtesting their current quantitative model on the same period, Bernstein found that it would have beaten the index by 4 percentage points per year. However, stocks passing both criteria would have outperformed the S&P 500 by 6 percentage points annually.

CVS Health offers high quality earnings and a strong outlook for health insurance subsidiary Aetna, especially in Medicare Advantage plans, per Bernstein. The biggest seller of prescription drugs in the U.S. with 0ver 9,900 stores, CVS also has a pharmacy benefit management (PBM) unit, which negotiates discounted prices from drugmakers, serves over 102 million members. A growing business is its 1,100 in-store MinuteClinics that offer low cost routine medical care, with over 42 million patient visits and a 95% satisfaction rate, per CVS.

CVS stock has been a laggard in 2019, up by only 2.4% for the year as of the close on Oct. 24, based on adjusted closing prices. Its 3Q 2019 earnings report is scheduled for Nov. 6, and the consensus calls for EPS to be up by 2.3% versus the same period in 2018.

Chipotle has been a stellar performer in 2019, its stock up by 84.9% year-to-date through the close on Oct. 24. Adjusted EPS for 3Q 2019 beat the consensus by 19.4%. Revenues increased by 14.6% year-over-year and beat the estimate by 1.8%. Comparable store sales rose by 11% YOY, surpassing recent management guidance, which had projected roughly 7.5%. Other positives were an increase of 210 basis points in restaurant operating margins, and an 87.9% year-over-year increase in digital sales, which were 18.3% of total sales.

Looking Ahead

For Chiptole, its forward P/E ratio of about 45 indicates that very high expectations about future growth are reflected in the stock price. Bearish analysts note rising costs of delivery and technology, as well as guidance that points to a deceleration in new store openings.

For CVS, the acquisition of Aetna significantly increased its debt load, which may preclude dividend increases and stock buybacks for several years, though the stock does yield an attractive 3.1% currently. Health care remains a politically contentious topic, and the outcome of the 2020 elections may have significant ramifications for CVS.