- The first 6 months of 2022 were marked by the dreaded stock market crash. The main causes were the war in Ukraine, an inflation not seen in over 40 years and a rapid rise in interest rates. This brought the negative sign to all markets around the world, including the U.S. market.
- The Everest Formula even in this dramatic managed to outperform the U.S. stock index, although also registering the negative sign in the first 6 months. From January 1 to June 30, the Everest Strategy recorded an average performance of -17.3%, compared with the -20.6% loss of the S&P500 index.
- In this article we are going to comment the results of the Everest Formula in the first half of 2022, analyzing both the best stocks discovered by the Everest Formula and the choices that have most negatively affected the strategy in 2022.
Performance over the last 6 months
In the first half of 2022, the Everest Formula 3-stock strategy had a performance of -14.2%, turning a hypothetical portfolio of $10,000 invested on January 1, 2022 into $8,598 on July 1, 2022. The 10-stock Everest Formula strategy had a slightly lower return and was in line with the S&P500 index, registering a performance of -20.6% and turning the same amount into $7,940.
To be as transparent as possible, this result might not be considered satisfactory for a strategy that has returned more than 30% annually on average over the past 22 years, especially for users enrolled at the beginning of 2021 who made gains of up to 67% in a single year before the current slump.
However, analyzing the backtests during periods of market crashes, we find that the current downtrend has always occurred in the two recessions that have characterized the last two decades: indeed, in 2008, with the financial crisis, the S&P500 index posted a 50% loss. Everest Formula itself had a loss in the same period of 47%, before making a major rebound and coming out of the downtrend more strongly than the corresponding index. The same behavior occurred in the 2020 crash, with the S&P500 index collapsing in one month by 34%. During this period, the Everest Formula fell 26%, before recovering quickly and bringing extremely positive performance in 2021.
This behavior has always occurred since the existence of the stock market: during crashes, fear rises in investors, who tend to sell all of their stocks, including those with the best prospects or that seem unaffected by the crisis. It is during these periods that the best investors like Warren Buffett have built their fortunes, hence the famous saying “Buy when you see blood flowing in the streets.”
Another thought worth mentioning is that the negative performance of this semester was caused by a few “unlucky” choices by the formula that brought most of the losses, one of them being the listing of the company Coinbase, which has experienced a loss in its value of more than 80% from the beginning of the year to date. This company, while seemingly a very good company with strong balance sheets and with very low multiples, is a one-of-a-kind company because its value is almost exclusively linked to the value of Bitcoin and cryptocurrencies, which as everyone knows have slumped significantly in recent months. The company was ruled out in May by the formula’s precision filter, which identified negative cash flow in the last report and prevented further losses, but by that time the major losses had already occurred.
Many investors advocate that the major limitation of quantitative strategies, such as the Everest Formula, is that they are not able to identify with human qualitative assessments the dangerous cases of companies that look good but conceal large risks. Although this is true, it should be noted that there are opposite situations where the human eye, even when experienced and competent, is notoriously biased in the financial sector by cognitive and subjective biases and fails to identify obvious opportunities for a quantitative algorithm.
Everest Formula backtests seem to show that the latter are more frequent than the former.
Everest Top Picks
In a period whereby almost all companies have recorded negative performance, The Everest Formula has managed to discover some good deals that are worth analyzing to see whether are still good buys.
SAFM – Sanderson Farms Inc.
Sanderson Farms was founded in Mississippi back in 1955, the firm is a vertically integrated poultry processing company that produces, processes, markets and distributes frozen and fresh chicken products. They are currently the third largest poultry producer in the US and processed over 4.8 billion pounds of meat in 2020. The firm operates 12 Poultry plants and an integrated poultry complex in Texas. The company is an optimal defensive stock in the current market environment because it operates in a sector that fulfills primary needs that tends to keep its value in a recession environment.
For 2021, the firm’s revenue was $4.80 billion, up an incredible 34.7% higher than the $3.56 billion in 2020. In 2022, the trend continues and the trailing 12 months’ revenue has reached a staggering $5.2 billion, with profits soaring by 40% to $839 million, up from $596 million at the end of 2021.
Everest Formula discover SAFM in the middle of January, and at the start of March it entered the top 3. The stock did extremely well, thanks to the increased profits that are guided by the current high-inflation environment that push the poultry prices up in the last months. Since the top 10 entry, the stock is currently +14%.
SAFM current outlook: Sanderson Farms is still in the top 10 of the Everest Formula, at position 7, and is still one of the best stocks that we like to have in this bear market. It’s a purely defensive play in the current high-inflation environment: SAFM is a company with huge profitability and a PE ratio of only 5.5 in a sector that is headed for growth if the inflation will not calm down.
OLN – Olin Corporation
Olin Corp. is a business inserted in the chemicals industry. They produce basic chemicals like chlorine, sodium hydroxide, copper alloys, epoxies, vinyls, and ammunition. The company has been involved in Chlor Alkali for going on 120+ years and is one of the world’s leading producers of Chlor alkali and derivatives. This company has seen massive growth for its business segments since the drawdown in earnings in 2020, which saw EPS go close to negative. Its facilities are in the USA, as well as Canada and Germany.
The Everest Formula recognized OLIN as a bargain due to its excellent fundamentals mixed with a really low valuation. The stock entered the top 10 at the beginning of February and left it after 3 months, giving the Everest Formula’s users a return of +25.8%. This amazing performance was due to the increasing costs of the chemical products that the company sells, together with very good numbers in the last earnings report of April. The stock exited from the top 10 due to the increased price which makes it not one of the best bargains anymore.
OLN’s current outlook: one month after OLN was out of the top 10, the stock dropped rapidly by more than 32%, due to some news reporting that OLN is temporarily curtailing a part of its production due to weaker-than-expected demand in North and South America. The stock was then further punished by the consequent lower targets of some analysts and now it is approaching the top 10 again (it is currently in position 11).
The weaker demand is probably a short-term headwind that the investors are overestimating, and the stock is poised to soar again. Looking at its fundamentals, the company continues to be very well managed, with a solid balance sheet and good management able to keep the company highly profitable in every situation.
Conclusions
After 2021 of outstanding results, the Everest Formula follows more closely the market behavior during the current drawdown. Looking at backtests during the last crises, this was an expected behavior that could follow a big rebound in performance. This could be the best time to start following the Everest Formula strategy.
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