A recession score simply reflects the difference between base score and global macro score. The best recession scores will therefore consist of stocks with high base scores (computed as if assuming recessionary, ie. sub-2% iGDP, conditions) and low macro scores. Shown above are the top 15 stocks by recession score in North America as of end of September 2014 as well as their return relative to the MSCI North America index for the period ending February 2016. All of them outperformed significantly over this period of depressed iGDP, with median excess return +38%. Unsurprisingly, the list contains many stocks from “defensive” sectors such as healthcare and staples, as well as other high quality, low global macro score stocks. Over Sep-14, iGDP rapidly went from mid-single digit to negative before turning just as rapidly from negative back to mid-single digit over Feb-16. Because drops in iGDP (below 2%) are so sudden and unpredictable, it makes sense to position the portfolio to always have a better than average recession score. Likewise, replacing a couple of low recession score holdings with high scoring ones can significantly help protect the portfolio against large losses.
After iGDP troughs and starts to recover, the focus moves away from recession to recovery scores. Butterwire’s recovery score is most useful during these periods as it helps spot “bottom-fishing” opportunities, that is, stocks that have been beaten down as iGDP tanked but may offer exceptional short-term gains (ca. 6 months out) as iGDP returns to “normal” historical levels. The last such period was Feb-16 to Jul-16. The list above represents the top 15 recovery scores in Europe as of July 2016. It ended up containing 93% of winners over the 6 months to January 2017, generating a median excess return of 29%.
Recovery scores are only assigned to bottom decile performers (based on previous 12 months). The best recovery scores consist of stocks with high base scores but low fitness and momentum scores. The list will typically consist of banks, autos, and other such “early-cycle” stocks. Opportunistically buying a few such stocks (e.g. in place of those bought during the recession period) and holding on to them for a shorter than normal period (of say, 6 months) can very usefully contribute to portfolio performance.
Butterwire reports both base scores, together with the recession and recovery scores, and singles out the one or two scores that are believed to carry the most reliable signals given prevailing market conditions.