Portfolio Blueprint: A Step-by-Step Guide
Build Portfolios Based on the DNA of Winning Stocks
Portfolio Blueprint automates the complex process of quantitative analysis. Instead of asking you to build complex screens, it backtests dozens of proven factors based on your investment style and automatically identifies the single best-performing factor for your desired period. This guide explains how to use it.
Step 1: Define Your Strategy Inputs
This is where you set the core parameters for your backtest. The tool will use these settings to find the optimal investment factor for your goals.
1Choose Your Investment Focus
Select the investment style you want to explore. This tells the tool which category of factors to test.
- Value: Find factors that identify undervalued stocks (e.g., low P/E Ratios).
- Earnings Growth: Find factors related to strong and stable profit growth (e.g., high ROE).
- Price Momentum: Find factors that identify stocks with strong recent performance.
- All Factors: Test every factor across all categories to find the absolute best performer.
2Set Portfolio and Date Parameters
Define the size of your portfolio and the historical period for the backtest.
- How many stocks would you like to own?: Enter the number of top-ranked stocks to include in the portfolio at each rebalancing date (e.g., 10, 20).
- Date Range: Select the start and end dates for the analysis. Use the quick buttons (
YTD,5Y,10Y,Max) for fast setup. A longer timeframe provides more data for a more robust test.
3Activate Optional Shields
These are advanced overlays that apply risk-management rules to your strategy.
- Activate Bear Market Shield: If checked, the strategy will move to cash when the S&P 500 is below its 12-month simple moving average, aiming to avoid major downturns.
- Enforce Tactical Diversification: If checked, the portfolio will limit its exposure to any single sector to a maximum of 30%, preventing over-concentration.
Step 2: Run Analysis & Review the Blueprint
After setting your inputs, click Find Optimal Factor. The tool will backtest all relevant factors and present the results in a comprehensive dashboard.
The Blueprint Summary
This is your high-level overview, displayed at the top of the results. It shows you the single Optimal Factor with the highest return, along with the strategy's Average Annual Return compared to the S&P 500.
Understanding the Tabs
The results are organized into six tabs for deep analysis:
- Current Picks: The actionable output. This tab shows you exactly which stocks meet your strategy's criteria today.
- Selection History: A detailed log of every stock held during each rebalancing period throughout the backtest, including the portfolio's return for that period.
- Performance: See calendar-year returns and average annual returns over various horizons (1, 3, 5 years, etc.). This tab helps you understand the strategy's performance in different market environments.
- Risk & Efficiency: This is where you understand the character of your strategy. It includes key risk metrics like Max Drawdown, Volatility, and market Betas, along with our proprietary BacktestHQ Risk and Efficiency Ratings.
- Rolling Analysis: This crucial tab shows how consistent the strategy is over time by charting its rolling 1, 3, and 5-year annualized returns. It helps answer whether the performance was concentrated in just a few good years or was steady over time.
- Charts: Visualize the strategy's growth over time with the Equity Curve, which charts your portfolio's value against the S&P 500. This tab also contains important performance disclosures.
Factor Definitions
Value Factors
Price-to-Earnings (P/E): Compares a company's stock price to its earnings per share. A lower P/E may indicate an undervalued company.
Price-to-Book (P/B): Compares a company's market value to its book value. A lower P/B can suggest undervaluation.
Price/Sales (TTM): Compares a company's stock price to its sales per share. Useful for valuing companies that are not yet profitable.
Price to Operating Cash Flow (TTM): Measures a stock's price relative to its operating cash flow per share. A lower ratio may indicate a bargain.
Enterprise Value to EBITDA (EV/EBITDA): Compares a company's total value to its earnings before interest, taxes, depreciation, and amortization. A lower ratio is often preferred.
Shareholder Yield (TTM): A combination of dividend yield and buyback yield, representing the total return provided to shareholders.
Dividend Yield (TTM): The total annual dividend payments as a percentage of the current stock price.
Operating Earnings Yield: The inverse of the P/E ratio, using operating income. Shows the percentage of each dollar invested that was earned by the company.
Price/Gross Profit (TTM): Compares the company's market cap to its gross profit. A lower ratio can indicate undervaluation.
Price/EBITDA (TTM): Compares the stock price to the company's EBITDA per share.
Price Momentum Factors
1, 3, 6, 9, 12-Month Return: The percentage change in the stock's price over the specified period.
12–1 Momentum (12m ex-1m): The total return over the last 12 months, excluding the most recent month. A classic momentum factor that aims to avoid short-term mean reversion.
Risk-Adjusted 12m (12m / 6m vol): The 12-month return divided by the 6-month volatility, measuring momentum on a risk-adjusted basis.
Earnings Growth & Quality Factors
Return on Equity (ROE): Measures how effectively management is using investors' money to generate profits. Higher is better.
Return on Assets (ROA): Measures how efficiently a company is using its assets to generate earnings. Higher is better.
Revenue/EPS Growth YoY (TTM): The percentage increase in sales or earnings over the past twelve months compared to the previous twelve months.
Quarterly EPS Growth YoY: The percentage increase in earnings in the most recent quarter compared to the same quarter last year.
EPS Growth 3-Year CAGR: The compounded annual growth rate of a company's earnings per share over the last three years.
Revenue/EPS Stability: Measures the volatility of revenue or earnings over the past 8 quarters. Lower values indicate more stable and predictable business performance.
Operating Margin (TTM): The ratio of operating income to revenue, showing how much profit a company makes from its core business.
Share Buyback Yield (12m): The rate at which a company has been buying back its own shares. A positive value indicates a reduction in share count.