The Quality Momentum Portfolio

A rules-based two-factor strategy. First a hard quality minimum removes every company that is not actually profitable — positive operating margin and positive return on assets, with missing data treated as a fail, never a pass; then the survivors are ranked by residual momentum — 12-month price momentum with the most recent month skipped, measured net of each stock’s beta to the market. Hold the top 25 equal-weight, re-rank monthly. No forecasts, no discretion. Tested point-in-time back to 2009 against both the S&P 500 and the Nasdaq-100 — the honest caveats are shown right next to the results.

How the strategy is computed

Every month-end, using only data knowable at that date (annual filings with a 91-day lag, plus that day’s price):
  • Hard quality minimum — a company qualifies only if it is genuinely profitable: positive operating margin AND positive return on assets in its latest annual filing. A company with missing data fails — no data, no entry. This deliberately excludes pre-revenue and story stocks regardless of how strong their price momentum is.
  • Residual momentum — rank the survivors by their 12-month-minus-1-month price return net of market beta (the stock-specific momentum, not the part that just moved with the market).
  • Hold the top 25 equal-weight; re-rank at the next month-end. Universe: US stocks ≥ $1B market cap at the rebalance date, with a point-in-time tradability floor — a median daily dollar volume of at least $5M over the three complete months before the rebalance (a name that barely trades cannot be bought at the modelled cost, so it does not belong in the test or the basket). Returns are price-only (dividends excluded on both sides).
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The 25 holdings are for Premium members

The full performance and backtest below are free for everyone. Premium unlocks this month’s 25 positions with live tenure, updated automatically at every month-end rebalance — $19/month or $149/year, with a 14-day free trial.

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The backtest — full period and three independent windows

Same rules applied point-in-time. The 2012-2016 and 2009-2012 windows were run after the strategy was designed on 2016-2026 data — a genuine out-of-sample check. Benchmarked against the S&P 500 (SPY) and the Nasdaq-100 (QQQ).

The chart shows total return since the selected period started, after 0.3%/trade costs on the strategy side — the strategy (green) against the S&P 500 (SPY, grey) and the Nasdaq-100 (QQQ, purple). The CAGR figures are that same result as a constant annual rate; the % scale on the chart isn’t directly comparable to the yearly stats. Switch the tabs for the full run or each window.

Honest limitations — read before drawing any conclusion

Educational purposes only — not investment advice. The Quality Momentum Portfolio is a rules-based research strategy, not a recommendation to buy or sell any security.

All performance shown is hypothetical and backtested — computed by applying the rules to historical data, not achieved with real money. Backtests have inherent limitations: they benefit from hindsight; may not capture all real-world costs, taxes or slippage; and the test universe is subject to survivorship bias — companies that delisted or went bankrupt are under-represented, which can overstate returns. Results starting near the 2009 market bottom are flattered by that entry point, and the strategy was selected after testing many variants, so part of the historical edge is the luck of that selection.

Past performance — real or hypothetical — does not guarantee future results. This strategy is concentrated (25 stocks), more volatile than a broad index, with historical drawdowns approaching 40% in this test (worst −40%), and momentum strategies as a class are known to suffer sharp reversals — especially after crash rebounds — during which they can trail the index badly for extended stretches. You may lose money. Nothing here is personalized advice — consult a licensed financial adviser before investing. The Compound Family is not a registered investment adviser.