X - Trade Like The U.S. Congress: Q3 2023 Update

2023-09-06 08:32:50 ET

Summary

• Amid an increasingly uncertain macroeconomic forecast and a rapidly heating up political landscape ahead of the '24 presidential race, we revisit one of our most popular Congress-based trading strategies.
• The "Congress Buys" strategy tracks stock purchases by members of Congress and their immediate families, through their obligation to disclose them under the 2012 STOCK Act.
• It is the best performing strategy out of the more than two dozen strategies we operate, managing to achieve a compounded annual growth rate of 39%.
• In terms of individual traders, Congressman Josh Gottheimer is responsible for almost a third of the estimated trade volume, closely followed by Daniel Goldman and Nancy Pelosi.
• Current positions in the strategy include the likes of NGL Energy Partners, Qualcomm, Apple, Microsoft, and Cleveland-Cliffs.

Congress Buys Strategy Q3 '23 Update

Just a little more than a year ago, we published one of our most popular article series covering our trading strategies based on replicating congress members publicly disclosed trades as they are obligated to do so under the 2012 STOCK Act. Amid the increasingly uncertain macroeconomic forecasts and a rapidly heating up political landscape ahead of the 2024 presidential election, we thought it would be an interesting idea to revisit them and cover the topic again.

The question of Congressional insider trading is a topic that is slowly making its way back to the front page of the news, causing headaches for party figureheads across the board. Several bipartisan and individual attempts to restrict congress trading were already made, but ultimately all got axed on the Congress floor. Our favorite had to be Senator Josh Hawley's humorously named " PELOSI Act ", which also failed to gain much traction. The legislative body currently finds itself divided and in a technical deadlock, seemingly unfit to pass legislation of this magnitude as long as it remains divided among party lines.

Our article today will be an update focusing on the strategy's performance over the past year since we last had a chance to cover this topic. Our original article with the full thesis can be accessed through this link .

Out of the more than two dozen strategies we run, "Congress Buys" has without a doubt been the most successful out of the bunch, with regards to maintaining a steady compounding rate and minimal drawdowns. This strategy tracks the performance of stocks that have been purchased by members of U.S. Congress (or their family members), by opening a long position in the holdings they were forced to disclose based on the 2012 STOCK Act. The strategy is weighted based on the reported size of the disclosed purchases, with an implemented system of daily rebalancing.

If one were to have invested $100 million in the abilities of U.S. Congress members and their stock-picking abilities at the beginning of 2020, the principal would have compounded to $313 million as of today. The portfolio hit its peak at the beginning of August, shortly touching the $364 million mark. The "Congress Buys" strategy generated a 36.8% year-to-date return, outpacing the S&P 500 ( SPY ) by a wide margin. However, on a one-year basis, the performance has been lagging at 8.52%.

The compounded annual growth rate since the inception has been a rather outstanding at 39.36%, achieved with a Sharpe ratio of 1.26 and a 1.19 beta. This solidifies the position of the "Congress Buys" strategy as the most successful out of more than two dozen similarly designed strategies we are operating. Its top positions we are analyzing today include NGL Energy Partners ( NGL ), Qualcomm ( QCOM ), Apple ( AAPL ), Microsoft ( MSFT ) and Cleveland-Cliffs ( CLF ), accounting for almost 92.6% of the portfolio.

The portfolio's smaller scale positions includes companies such as Linde ( LIN ), Alphabet ( GOOG ) ( GOOGL ), Walgreens Boots Alliance ( WBA ), Devon Energy ( DVN ) and Chord Energy ( CHRD ). In the third quarter, the strategy also held open positions in the likes of FedEx Corporation ( FDX ), Marriott International ( MAR ), BP ( BP ), PayPal ( PYPL ), Honeywell International ( HON ), and Ford Motor ( F ), but has since closed these out during last week's rebalance.

NGL Energy Partners ( NGL )

NGL has been one of the absolute winners of the 2023 rally so far, outpacing the price growth even amongst the most energetic tech companies. The company is in the business of transporting, storing, and blending natural gas liquids, refined products and most interestingly water solutions, a segment of their business that grew by more than 30% since last year. Its rapidly improving operating results over the past couple of years allowed it to generate an outright impressive 230% run up year-to-date. The only open question is how long things will last, with the latest quarterly results already showing signs of a significant slowdown. The diversified midstream partnership is far from a straightforward investment, as it is still struggling to deleverage, with its debt serviceability coming under questions. On the surface, the market is still assigning its cash flows a relatively low-price tag, as NGL currently sells for a valuation of EV/EBITDA of 6.28x and a P/FCF of 2.04x. The last twelve months saw the partnership generate razor thin margins with the gross margin at 13.3% and operating margins of only 4.7%. Both SA and Street Analysts rate the firm as a "Hold", with a lack of a clear censuses on its future. The stock was included in the "Congress Buys" portfolio on the 10th of April and remains the top position taking up 32% of the NAV. Units of NGL can currently be purchased for $3.91 per share.

Qualcomm ( QCOM )

QCOM is widely recognized as one of the leading semiconductor and telecom equipment firms. Specifically, QCOM is in the business of designing and producing wireless telecommunications products and services. It is perhaps best known for the cellular communications and technologies space, first and foremost for its Snapdragon line of processors used in many popular smartphones, including Samsung android. With the extremely starched valuations within the semiconductor space, Qualcomm's valuation does seem to be rather fair. The stock is currently being sold for an NTM EV/EBITDA of 10.25x, an NTM P/E of 13.37x, and an NTM P/FCF of 13.27x. It also offers a 2.81% dividend. The company has been under a lot of pressure lately, generating a one-year return of -17.0% and a 6.14% year-to-date return, slightly falling behind the S&P 500. Analysts from both SA and Wall Street are rating the stock as a "Buy" and remain very enthusiastic about its future prospects. Qualcomm has been a holding of the Congress Buys portfolio since the beginning of the year and has so far performed decently well. It represents the third largest holding within the portfolio and takes up 18.18% of the NAV. The position has returned just short of 8%. Its shares are currently selling for around $117.

Apple ( AAPL )

When discussing tech giants and discounts, Apple is a company that investors definitely did not get a chance to buy at depressed prices during the 2022 market sell-off, unlike other giants such as ( META ) or Alphabet ( GOOGL ). After a quite brief down-pressure, the stock recovered and went way beyond what many investors thought plausible. It's generated a brilliant 51% year-to-date return and trades very close to its all-time-high it reached earlier in the month. The iPhone producer was held for quite some time in high regard among institutional and retail investors alike, bidding up the price of AAPL to a point at which it's now selling for an EV/EBITDA of 21.89x, P/E of 28.62x, and a P/FCF of 27.85x. It also rewards investors with a token yield of 0.52%. SA Analysts are cautious about the somewhat stretched valuation of an otherwise brilliant company, assigning it a "Hold" rating. Wall Street Analysts, however, remain undeterred and are still bullish assigning it a "Buy" rating with an average score of 4.11/5.00. Last time it joined our portfolio was on the 21st of August and it takes up 18.25% of the NAV as the second largest holding. Shares of Apple are currently trading at $189.41.

Microsoft ( MSFT )

Perhaps another example of a stock defying all expectations is MSFT, having completely erased the 2022 losses in a bid up to all-time highs for the software, gaming, and cloud computing giant. Investors had a brief chance to pick up shares of MSFT for as little as $214 per share during the bottom of the 2022 sell-off, which look like distant times from where we stand today. Upcoming catalysts such as the possible October finalization of the Activision Blizzard ( ATVI ) acquisition could further bid up the stock. Microsoft generated a year-to-date return of 37.08% and a one-year return of 23.82%. The company has been commanding a premium valuation for some time now, with the market willing to buy shares that are selling at an NTM EV/EBITDA of 10.22x, NTM P/E of 29.83x, and NTM P/FCF of 36.29x. Both Street Analyst and SA Analysts remain exceedingly optimistic on MSFT, with both groups of analysts on average rating the stock as a "Buy" with an average score of 4.44/5.00 and 4.90/5.00, respectively. A long-time favorite on the Congress floor, it takes up 17.18% of the NAV. Shares of Microsoft can currently be purchased for $333.

Cleveland-Cliffs Inc. ( CLF )

Cleveland-Cliffs is the largest vertically integrated flat-rolled steel company in the United States and represents a leading supplier of automotive-grade steel that is known for its self-sufficiency and self-dependence within the production process. CLF's control over its production process allows the company to have full oversight from upstream mining to downstream stamping and tubing. The Ohio-based company saw its market cap cut in half during the past year, after underperforming the S&P 500 by a wide margin. The firm has generated a one-year return of -17.5% and a year-to-date return of 8.8% as of today. This has likely led to one of the best deals in the Congress Buys strategy, with the firm being traded for only an EV/EBITDA of 5.36x, a P/E of 9.40x, and a P/FCF of 8.06x. The steel company made headlines as it launched a now failed bid for its competitor United States Steel ( X ). SA Analysts have been struggling to find common ground concerning the prospects of the company, assigning it an average rating of "Hold" with a score of 3.37/5.00. Wall Street Analysts, on the other hand, do not share the same sentiment, being willing to assign CLF a "Buy" rating with an average score of 3.77/5.00. CLF joined the portfolio in late July. Shares of Cleveland-Cliffs are currently trading at $15.30.

Most active congressional trader?

The 2012 law dramatically increased the disclosure obligations for securities transactions involving Congressional members and other high-ranking government officials. Henceforth, it allowed us to be download those disclosures, parse them for stock trades, and aggregating the results. Last year alone we processed 3791 trades with an estimated trade volume of $149.68 million. We are often asked about the most active traders on the Congress floor. One politician in particular is responsible for almost a third of the estimated trade volume, and that is New Jersey Rep. Josh Gottheimer.

We have added more than 400 stock trades made by the U.S. Congressman during the quarter. Josh is a relatively young 48-year-old attorney, writer, and politician who is representing New Jersey's 5th congressional district. He is a long-time member of the Democratic Party, serving as an adviser to the presidential campaigns of Wesley Clark, John Kerry, and Hillary Clinton. Before running for Congress, he also served as a speechwriter for President Bill Clinton and also a former executive at Microsoft. Ironically, he loves to trade MSFT stock and options although likely his best trade of the year was buying Nvidia ( NVDA ) in early March, having already more than doubled from that point. He is closely followed by Rep. Daniel Goldman and Rep. Nancy Pelosi as fellow active congressional traders.

Senator Tommy Tuberville is also quite an active and also successful trader. We reported just recently in fact on his purchases of small bio-tech firm Humacyte ( HUMA ) whose stock surged following news their technology would be used on the front lines of the Russian-Ukraine War. Tuberville sits on the Senate Committee for Armed Services and his purchase came just prior to the firms announcement. He's now up more than 40% on the trade

Closing thoughts and conclusions

The question at the heart of the congressional insider trading issue is whether or not members of Congress have an unfair advantage in the stock market because they are entitled to information, sometimes on a daily basis, that is generally not available to the average investor. Some examples of this kind of information include classified briefings about national security issues, early knowledge of specific regulatory actions, as well as non-publicly available details about the legislation, appropriations, and changes in tax policies.

In theory, any piece of the said information has the opportunity to create a conflict of interest for the lawmaker and open up a way for the individual to deliver significant alpha on the market. The results seem to solidify that thesis, as the Congress Buys strategy marks another successful year of outperforming the market, even creeping up to a single-digit positive return in a year where a fifth of the S&P 500 market value has been practically erased. Only one of our Congress-based trading strategies has underperformed the market over the past year, with most of them outperforming by a broad margin. Until better regulation has a chance to see the light of day, we remain convinced that there is value in monitoring the trading activity of our country's political leaders.

It has been established throughout the last year that both through mini-bear and mini-bull cycles, legislators managed to deliver significant alpha. This combination of men and women sitting on boards and committees with privileged access to information are seemingly unrivaled even by the largest financial institutions and top-of-the-line wealth management and advisory services. Further to the point, this might very well be the last chance we have to discuss this trading strategy, as a long-discussed ban on congress members' stock trading is beginning to gain some major traction on the floor.

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