Twisting the Fundamentals with Revenue Shares

Market analysis comes in all shapes and sizes, but they primarily boil down to three types, fundamental, technical and quantitative. In the ETF universe we find most funds to be indexed based or fundamentally base with a quantitative twist. A new entry this week from Research Shares takes a fundamental index build by Louis Navellier and adds a quantitative twist based on revenue. I’ll bet you didn’t see that coming with the name of the company “Revenue Shares”. I spoke with Sean O’hara, President of Revenue Shares, this week and discussed the particulars of the Navellier Overall A-100 Fund, Symbol (NYSE: RWV).

My mission in this conversation was to determine as an investor why I would put my money in this ETF. As one who tracks, invests and writes about ETFs I am always interested when a new fund is launched. After all we only have 747 to choose from. The following are points of interest I took away from this conversation.

The foundation of the ETF is to take the top 100 stocks from the proprietary method used by Navellier encompassing eight fundamental data points. Navellier then ranks the stocks A,B,C,D,F. The top 100 A’s are put in the Navellier Overall A-100 Index. Revenue Shares then takes the same 100 stocks and ranks/weights them according to revenue. This creates a fund focused on revenues versus earnings or some other fundamental criteria. To simplify this explanation for space sake, the fund will give higher weighting to stocks with rising revenue than stocks will falling revenue. The academic model was back tested and for the 10 year rolling period outperformed the benchmark 100% of the time. Thus, the alpha factor proved valid enough to produce the fund. As with any index back tested base on a theory, actual results will differ based on market performance.

The methodology of using revenue versus other fundamental criteria, creates an all-inclusive benchmark. In other words when using the S&P 100 index for example, you would have all 100 stocks represented in the fund. If you used earnings as a criteria, during a period like now some stocks would be omitted because they are losing money or have no earnings. With revenue they are all included, after all you have to have top line revenue in order to create a bottom line result (last line borrowed from their website).

Due to the use of the Navellier based index, the fund is rebalance once per quarter and the weighting adjusted based on the above criteria. According to Mr. O’hara, “rebalancing is the key to success of the strategy.”

Based on the objective and methodology of the ETF it is based on a long-term investment strategy. The research and back testing shows the most effective time periods to be 10 year rolling averages. After a year like 2008 it is tough for investors to think long-term. But, maybe now is a good time to think long term with market in a bottoming process of one of the worst corrections in recent history.

To step into the role of an investor evaluating this fund I would have to look at it based on a fundamental strategy. For example price-to-sales ratio. The current price-to-sales ratio of the S&P 500 index is .85 down from 1.08 at the end of the third quarter. This presents an opportunity from my view for the fundamental strategy of the fund. If the S&P 500 index hits a price-to-sales ratio of 2.5 time at the peak of a bull market on average the upside potential is evident fundamentally. This of course would take a long-term time horizon into account. In addition the price-to-earnings ratio is 9.3 for the fund compared with  25.3 for the S&P 500 index. The relative value is evident it is just a matter of the recession ending and the bull market beginning.

The fundamentals are attractive and the strategy of the fund make sense, the challenge comes in the proof of reality and that will only come with time. This is a new ETF and the only reality currently is back testing. Given time we will see how it holds up to the reality of the market day to day.

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About the Author

Jim Farrish

Founder & Editor of

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