Example: Building a Stock Selection Pipeline

Introduction

This tutorial demonstrates how to use CDAP's Data Preparation and Data Pipelines to build a stock selection pipeline that ingests market data and identifies a set of stocks that should be purchased.

Scenario

You work in the financial industry and trade in U.S. equities markets. To select top stocks for purchase, you need to ingest large amounts of market data with many different variables, process this data, and return your stock picks.

  • You want to write a stock selection pipeline that uses the criteria given by Greenblatt's Magic Formula.
  • You want to write your selections to a database that will be read by a program which submits your selections to the NYSE

Data

Click below to download a .csv file containing the data necessary to complete the tutorial.

stock_data.csv

Video Tutorial

Step-by-Step Walkthrough

Loading the Data

First, download the file from the Data section above.

To begin, navigate to the Data Preparation tab from the CDAP homepage. In Data Preparation, choose the arrow on the left hand side.

Upload the stock_data.csv from the File System.

Background

You are building a stock selection pipeline. The pipeline takes in all stocks on the NYSE and at each stage in the pipeline and reduces the number of stocks that are under consideration for purchase.

You are implementing a popular strategy in this tutorial known as Greenblatt's Magic Formula. You will adjust our strategy slightly:

  1. Establish a minimum market capitalization greater than $50 million.
  2. Exclude utility and financial stocks.
  3. Determine company's return on capital = EBIT / (net fixed assets + working capital).
  4. Rank all companies above chosen market capitalization by highest return on capital.
  5. Invest in 20 highest ranked companies.

Establishing the Minimum Market Capitalization

First, you want to establish a minimum market capitalization.

Start by selecting the stock_data.csv tab. Choose the drop-down menu for the body column and apply Parse > CSV with the 'Set First Row as Header' option selected. From the body column drop-down menu, choose Delete Column to delete the body column.

To calculate the market capitalization of the company, you want to find the share price multiplied by the number of outstanding shares. You will express this as:

estimated_shares_outstanding * (high + low) / 2

where high and low are the stocks' daily high and lows.

You can use a custom JEXL expression to calculate the market_capitalization.

First, you need to set the type of all the involved variables to the correct data type. Currently, high, low, and estimated_shares_outstanding are all strings.

At the bottom of the screen, type the following directive:

../_images/set-type.jpeg

This will change the data type for high to a double. Repeat this for low and estimated_shares_outstanding. All three of these columns should now be doubles.

Now, choose the estimated_shares_outstanding drop-down column and select the Custom Transform option.

../_images/market_cap.jpeg

The result of the calculation was stored in estimated_shares_outstanding (since this was the column you selected for the custom expression), so rename it market_capitalization by clicking once on the column name and typing the new text.

Finally, you want to filter out all companies with a market capitalization under $50m dollars. Scanning the data on the screen, you will see that no companies displayed in Data Preparation have a market cap under $50m. However, Data Preparation only samples 100 rows from the dataset, so there may be companies that do have a market cap under $50m elsewhere in the data.

To filter out these small cap companies, select the market_capitalization column choose the Filter option. Apply the custom condition ">50000000", as shown below.

../_images/under50.jpeg

Excluding Financial and Utility Stocks

Your next step is to exclude financial and utility stocks. This is similar step to establishing the minimum market capitalization.

Select the drop down for the gics_sector column and choose Filter. Choose "Remove Rows" if the column contains "Financials" (as shown below). Repeat this setup for "Utilities."

../_images/financials.jpeg

Calculate Return on Capital (ROC)

Our final setp is to Calculate Return on Capital (ROC). ROC is defined as:

EBIT / (net fixed assets + working capital)

or equivalently (using our columns):

` earnings_before_interest_and_tax / (fixed_assets + (total_equity - total_liabilities))`

Before you can calculate the ROC for each company, you need to convert the type from String to Double for the columns earnings_before_interest_and_tax, fixed_assets, current_assets, and current_liabilities. This can be achieved by using the set-type directive. For example, you should apply set-type fixed_assets double (in the directive prompt at the bottom of the screen).

Once you have converted these columns, select the total_equity column drop-down menu and choose "Custom Transformation." Apply the transformation earnings_before_interest_and_tax / (fixed_assets + (total_equity - total_liabilities)).

../_images/roc.jpeg

Since the result has been stored in the total_equity column, rename this column to roc.

Finally, you would like to express the ROC as a percentage, rather than a decimal.

Select the drop-down menu for the roc column. Choose Calculate > Multiply, and multiply by 100. You will see that the roc column now contains the return on capital as a percentage.

../_images/percentage.jpeg

Creating the Pipeline for Picking the Top 20 Stocks

Because Data Preparation only displays and operates on 100 records, you need a way to operationalize our logic for the whole dataset. Click "Create Pipeline" and choose Batch.

In this section, you will create a pipeline that will ingest all the stock data, filter by the criteria above, choose the top 20 stocks by ROC, and write to a dataset.

When you initially create the pipeline, you will see the view below.

../_images/percentage.jpeg

You need a way to feed the output from the Wrangler (Data Preparation) node into a node which will select the top 20 stocks.

You can turn to the Hub for the Top-N plugin. CDAP comes bundled with many useful plugins. However, the Hub - which is open app store for Big Data Applications - contains many more.

Click Hub in the upper right hand corner to open the hub.

../_images/percentage.jpeg

In the "Plugins" section, choose "Top-N."

../_images/topn.jpeg

Deploy the Top-N application. Save your pipeline - giving it the name "StockPipeline" - and refresh the page. You will see the Top-N plugin appear in the Analytics section of the the plugin menu on the left side of your screen.

Add a Top-N node to the canvas, as well as a Avro Time Partitioned Dataset sink.

Name the Avro Time Partitioned Dataset sink StockSink and also specify StockSink as the "Database Name."

../_images/stocksink.jpeg

In the Top-N plugin, specify the field to be "roc" (since this is the row which you want ranked) and the size to be 20 (since you want the top 20 stocks).

Connect the nodes in the order shown below.

../_images/pipeline.jpeg

Now click "Deploy" (found in the upper right hand corner). On the pipeline is deployed, press "Run."

Click the StockSink and choose "View Details." Here, you can run a query to see the top 20 stocks that were selected. You can see that the top 5, in order, are: BBBY, BIIB, AME, AMAT, and BMY.

The database can be queried using RESTful calls for a program which can execute the trades on the NYSE.