Adit's 20: Fundamental Stock Selection & the Effects of Sector Bias

This study evaluates a rule-based stock-selection model called “Adit’s 20,” which annually ranks eligible S&P 500 companies based on business quality, growth, financial safety, valuation, and volatility metrics and selects the 20 highest-scoring companies. This study addresses two questions: (1) Can a fundamental stock-selection model outperform the S&P 500? and (2) How does reducing sector bias affect the model’s return and risk-adjusted performance? The strategy was backtested over an eight-year period from April 1, 2018, through April 1, 2026, using historical S&P 500 membership and financial data. Three versions of the model were tested: an initial market-wide scoring model, a sector-relative scoring model, and a final model combining sector-relative scoring with a redesigned rubric intended to reduce sector sensitivity. The first version produced an annualized return of 13.39%, a volatility of 21.56%, and a Sharpe ratio of 0.693. The second version produced an annualized return of 12.89%, a volatility of 20.39%, and a Sharpe ratio of 0.699. The final version produced an annualized return of 14.80%, a volatility of 21.11%, and a Sharpe ratio of 0.762. For comparison, SPY produced an annualized return of 14.15%, volatility of 19.29%, and a Sharpe ratio of 0.784 over the same period. The primary limitations of the backtest were its eight-year testing period and incomplete historical financial data for some companies. A separate concern was potential sector bias in the scoring methodology. Changes in sector treatment were associated with differences in portfolio composition and performance, although the backtest cannot establish that reducing sector bias caused these differences. The final version generated a higher annualized return than SPY but also produced higher volatility and a slightly lower Sharpe ratio.