How It Works: Top Names

Calculating Potential Returns

Every trading day, Portfolio Armor generates high-end estimates of how more than 4,000 stocks and exchange traded products will perform over approximately the next six months. These estimates are based on analysis of historical returns as well as option market sentiment, which provides a forward-looking element. We call this high-end estimate a security's potential return. Essentially, it's how the security might perform over the next six months in a bullish scenario. We backtested this method of security selection by running our analysis every trading day over an eleven year period and then looking at the actual returns of the securities with the highest potential returns on our daily scans over the next six months. Over that 11-year period, we conducted 25,412 comparisons of our calculated potential returns to actual returns, an average of 9.4 top-ranked securities each trading day. The average potential return we calculated was 22.4%. The average actual return over the next six months, unhedged, was 6.84%. Since the average actual return was 0.3x the average potential return, we use that 0.3x multiple to derive expected returns from our potential returns. While a potential return represents a bullish upside, an expected return is the more likely result.

A subset of our top-ranked securities - 5,202 of them, or about 20% of them - had an even higher average actual return: 9.35%. All of our top-ranked securities were hedgeable with optimal collars, but the securities in this subset were also hedgeable with optimal puts (we call these AHP securities, for short). There aren't always AHP securities available, but when there are, our ranking system adjusts their potential returns upward proportional to their higher average returns in our tests.