Following a screen-based stock selection strategy is a double-edged sword. The upside is that it reduces the number of potential buys to a manageable level. The downside is occasionally it will prevent you buying a stock you believe could be a good investment.

I’ve found myself in that situation this week. One of the stocks on my personal watch list is parcel group UK Mail, which currently has a StockRank of 98.

I’ve now followed this company’s fortunes for several years, without investing. After enduring a tough couple of years, the business now seems to be in good shape and reasonably priced. I’m considering buying some for my own portfolio, and would also like to add it to the SIF portfolio.

Unfortunately, UK Mail has lagged the market over the last year. This means that the stock’s 1-year relative strength is negative. This is one of the 14 criteria I use to screen for potential buys for the SIF portfolio:

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(You can test whether a stock meets the criteria for a screen using the excellent Checklist tool) 

Frustratingly, UK Mail meets all of the other criteria. The temptation to break the rules is strong, but I’ve no intention of giving in. Firstly, breaking the rules on stock selection would sabotage my experiment in systematic investing, rendering the results worthless.

Secondly, there is a reason why I included a requirement for positive relative strength. I’m trying to find good, improving stocks. Companies that are already showing signs of outperforming the market.

Value vs. momentum?

Relative strength is a measure of how a stock’s price has changed over the period relative to the price of its market index. It’s a useful way of identifying stocks which are outperforming the market. Statistical evidence suggests that RS 1y is a negative signal in the short term but a positive indicator over a 6-24 month timeframe.

UK Mail shares are worth 22% less than they were one year ago. In contrast, the FTSE Small Cap index to which it belongs is up by 7.7% over the same period.

The value investor in me says that I should buy today. By the time UK Mail’s share price has moved ahead of the index, the shares will no longer be cheap. On the other hand, a…

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