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Alternative Market Briefing

Stock scientist's new aggressive growth fund up 22% MTD

Tuesday, October 20, 2020

amb
Robert Zuccaro
B. G., Opalesque Geneva:

The Golden Eagle Growth Fund, which actively invests in the world's fastest growing companies using a quantitative method, has had a good run this month; it is up 22.2% MTD through October 13th close and 111.5% YTD. The Fund began trading in May 2020.

It is managed by Robert Zuccaro, quantitative investment pioneer and CIO of Target QR Strategies, which is based in Florida and in New York. Before launching Target QR in 2014, Zuccaro founded Target Investors Ltd in 1983 and worked at E.W. Axe & Co. between 1977 and 1983 where he ended up as president. His son Marc Zuccaro, who worked at RBC and Lehman Brothers, joined at the launch of Target QR as COO.

On 31st May, Robert Zuccaro wrote a note to investors about the implications of the pandemic for the stock market: the time-worn orientation toward diversification should be discarded and replaced with an emphasis on investing in an array of tech stocks that are unimpacted or lesser impacted by the virus, he said. For those still intent on diversification, the QQQs are a better option than the SPIDERS. Note for the first time in history that the top six stocks by market cap in the S&P 500 are tech issues. The S&P 500 is also represented by stocks in the department store, airline, car rental and restaurant industries-some of which will disappear in the coming years. Why would an investor choose own an index containing future fatalities? This also applies to the broad-based mid-cap and small-cap indices. The smart money will recognize what is coming down the pike and seize a better opportunity at hand.

Robert Zuccaro was recently interviewed on Opalesque TV as part of the Virtual Manager Visit series. You can view this fascinating conversation here: How a veteran quant investor with 40+ years of experience still dominates the stock market .

Applying "New High Stock Disciplines" in stock selection

Target QR's stock process centres around the key variables of high profits growth and new high stock price patterns.

Each stock that goes into the Fund must pass through eight screens and twelve data points that are applied to a universe of 4,800 stocks. Minimum liquidity requirements for each stock skew the portfolio toward midcap and large-cap stocks. Minimum profits growth rates of at least 30% narrow the universe down to about 50 stocks before last new high history and recent price performance are taken into account. This results in a portfolio of the 25 best stocks. To the adviser's knowledge, Golden Eagle is the only fund that incorporates new high stock disciplines and strips out capital spending into its decision-making process and from deficit companies in order to determine profit potential.

So what is the New High Stock discipline? According to the manager, some investors regard a stock that establishes a first new high as being fully valued and at the end of its run. Target QR views a first new high as the start of another powerful upward move given its research findings which reveal that new high stocks display "predictive price patterns". Stocks that hit a first new high go on to record additional new highs 99% of the time. The number of additional new highs can often reach 20 or more over the ensuing weeks or months. For example, the top 10 performing stocks during 2007-2016 grew their profits anywhere from 10-100 times faster than S&P 500 profits.

Stock scientist

Robert Zuccaro has been a pioneer in quantitative research, positive earnings surprise work, and most recently in new high stock research.

"I don't regard myself as a portfolio manager per se; I never have even though I am often called that," says he says in his biographical notes. "I regard myself more as a stock scientist, one that is always scratching beneath the surface in mining data and running studies of some sort. I have always felt that, in order to manage money successfully, one has to be first and foremost a good analyst. The two functions are inseparable in my view."

When Senator Elizabeth Warren last year floated the idea of taxing all securities trades at the rate of one-half per cent, Zuccaro recognised that if the proposal became law, it would put Volcano and Quarter Horse, his two other hedge funds, out of business, due to their high turnover rate. So he started to work on an investment process that had the same objectives but a lower turnover.

"I dusted off one of my old studies on the Top 10 performing stocks during 2006-2015," he explains. "This study reveals that the big winners were accompanied by earnings growth that was 10-20 times greater than overall profits growth. I was hoping to create a quantitative process based on a low turnover with returns approaching those that rivalled my track returns of 20.4% per year. What came out of this research was my best model ever; these findings now serve as the bedrock for our newest fund, Golden Eagle Growth Fund."

He moved away from using positive earnings surprise because many others were using it, thus reducing its effectiveness. "Even though I had used positive surprise work to advantage in the past," he says, "I always thought that the tenets of this methodology were flawed for this reason. Why should a company report a year-over-quarter lower loss, be credited with a positive surprise and then be rewarded by a jump in price while another company reporting a 100% profit gain, which falls short of forecasts, gets punished with a price decline."

He had always argued that the earnings growth rate was far more important than any surprise, he adds. Golden Eagle's focus falls on fast earnings growth and as long as earnings are progressing at a fast rate and the stock is in an upward mode, the stock will continue to be held even in the face of a so-called earnings disappointment. When such a stock gets knocked down after a negative surprise, it typically bounces back and resumes its upward climb.

"With respect to my new high stock expertise, I have gone somewhere where no one else has gone before in the investment business," he says. "My research on new high stocks shows that such stocks go on to make additional new highs 99% of the time - often as many as 20 or more over the ensuing weeks or months.

"Golden Eagle's performance is a rarity among growth funds," Zuccaro concludes. "It tends to go up more in up markets and down less in down markets on days in which the S&P 500 declines. Unlike Volcano Fund and Quarter Horse Fund which are built to parallel their models, Golden Eagle is built to outdistance its model. Even though actual performance to date is brief, the Fund is tracking well ahead of its model and meeting all expectations."

His book entitled "How Wall Street Reshaped America's Destiny" will soon be released.


***

You can watch the full interview with Robert Zuccaro here: www.opalesque.tv/hedge-fund-videos/robert-zuccaro/1

***

WEBINARS:

The second episode of the Diversification Matters webinar series, where Opalesque presents investment managers who were up or protected in Q1-2020 and YTD and in previous years, will take place on:
- Tuesday, Oct. 27th 2020, at 10 am EST
- Registration (free): www.opalesque.com/webinar/

You can replay Episode 1 as well as other group and sole manager webinar presentations here: www.opalesque.com/webinar/#pastwebinar

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