The criteria I’ve used for my Stock in Focus screen fall into two categories. A small number are essential characteristics which characterise the majority of stocks in the portfolio. The remainder are safeguards to avoid ‘outliers’ carrying specific risks.
This week I’m going to highlight some of these key criteria and explain how they work against each other to restrict my choice of stock. Would it make sense to target a broader range of stocks?
Am I too focused on one type of stock?
The SIF portfolio was designed to target affordable growth stocks. The screening criteria include a number of rules whose purpose is specifically to reduce downside risk. This approach reflects my belief in the Warren Buffett rule that avoiding losses is as important as identifying winners.
This conservative approach has often resulted in a restricted choice of stocks. At the time of writing, just four stocks qualify for the screen. I’ve still had some big winners, such as IG Design (+49.5%), Avesco (+132%) and Beximco Pharmaceuticals (currently +60%). But serious growth picks such as Paul Scott success story Boohoo.com (up 255% in one year) have never qualified.
Nor have highly-ranked big cap income stocks such as housebuilders and insurance stocks, even though they’ve performed well since the referendum.
The portfolio will be one year old in April. This will give me a chance to tweak the rules if I want to. Would it make sense to relax certain criteria to capture a broader range of stocks? Or will any gains be offset by an increase in the number of losers?
The key screening criteria
There are four rules which have a huge impact on the number of stocks which qualify for the screen:
That’s only four out of 14 rules. You may wonder what the purpose the other 10 rules serve. I’ll come back to this in a moment, but first I want to explain how the four rules above combine to set a fairly high bar for potential buys.
Value, Quality, Growth & Momentum
You may already have spotted that the four rules I’ve listed above are each classic characteristics of a style of investing:
- Earnings yield (EBIT/EV) = Value
- Piotroski F-Score = Quality
- Low PEG ratio = Affordable growth …