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Screening Strategies

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James Montier Trinity of Risk Screen

James Montier Trinity of Risk is a short selling strategy that uses rules suggested by economist and equity strategist James Montier, who wrote Value Investing. He based the approach on three risk factors highlighted by value investor Benjamin Graham: Valuation Risk, Earnings Risk and Financial Risk. It identifies companies that could be overvalued, have poor quality earnings and might be financially distressed. Specifically it uses the Graham & Dodd price-to-earnings ratio and looks for companies that are reporting exceptionally high earnings growth but fail the Altman Z Score of balance sheet risk. James Montier wrote: "Risk isn't a number, it is a concept or a notion? Rather than running around obsessing on the pseudoscience of risk management, investors should concentrate on understanding the nature of this trinity of risks." Short selling shares can be very risky but the Trinity of Risk can still be used as an indicator of which stocks should be avoided. more »

Short Selling
3 Year Return: 115.7%
Tiny Titans

James O'Shaughnessy Tiny Titans is a small-cap momentum investing strategy set out by US fund manager James O'Shaughnessy in his 1996 book, What Works on Wall Street. It combines momentum and value factors and focuses on stocks capitalised at greater than £15m but less than £150m. Its key measures include the price to sales ratio and 1-year relative strength. O'Shaughnessy wrote: "Studies are nearly unanimous in their findings that small stocks (those in the lowest two deciles) do significantly better than large ones. We too have found tremendous returns from tiny stocks." He found that this strategy produced an annual compound return of 20.05% between 1963 and 2009. In 2012, O'Shaughnessy updated the strategy rules by replacing price-to-sales as the key value metric with 6 composited value factors. more »

Momentum Investing
3 Year Return: 73.1%
William O'Neil CAN-SLIM-esque screen

The William O'Neil CAN-SLIM-esque strategy is a growth investing strategy inspired by a proprietary model devised and owned by US investor and publisher William O'Neill. It focuses on growth metrics but also has a momentum component to determine when stocks should be bought and sold. The 7-pronged formula focuses on Current Earnings, Annual Earnings, New Highs, Products or Management, Supply & Demand for the shares, Leaders over Laggards in a sector, Institutional Support and Market conditions. William O'Neill wrote: "What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower." Studies by the American Association of Individual Investors in the US have found that investing rules based on O'Neill's approach have been some of the most successful over the last decade. The so called 'CANSLIM' acronym is a registered trademark of Investors Business Daily, and the approach has become famous and well followed in the USA. more »

Growth Investing
3 Year Return: 70.4%
Kenneth Fisher Price to Sales Screen

Kenneth Fisher Value is a value investing strategy based on the approach of US investor Kenneth Fisher, who wrote Super Stocks. The strategy aims to find value stocks but also considers some of the growth factors that were suggested by Ken Fisher's father, Philip Fisher. It looks specifically for stocks that appear undervalued based on the price-to-sales ratio. It also looks for low gearing, a history of earning growth, strong net margins and positive free cash flow. Ken Fisher wrote: "Very few investors have a rational basis for valuing growth stocks in the face of a lack of earnings. The stock loses supporters and falls, in time, much too far. The best managements react to difficulties and overcome them. In time, sales pick up. Later, profits begin to pick up. Simultaneously with the profit resurgence, the stock price begins to rebound." Latterly, Ken Fisher has suggested that the price-to-sales ratio has become less effective for identifying undervalued shares, however it continues to be widely used by investors. more »

Value Investing
3 Year Return: 54.7%
Jim Slater ZULU Principle Screen

Jim Slater Zulu Principle is a growth investing strategy inspired by UK investor Jim Slater in his book, The Zulu Principle. The strategy combines growth, value, quality and momentum factors. Its most famous ratio is the price-earnings-growth factor (PEG) which compares a company's forecast price-to-earnings ratio with its forecast earnings-per-share growth rate. It also looks for a high return on capital employed and positive relative price strength in small and mid-cap shares. Jim Slater wrote: "Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market." Jim Slater's son Mark Slater uses Zulu Principle-inspired rules at his MFM Slater Growth Fund, which achieved a total return of 61% over the three years to November 2014. Jim Slater is one of the UK's most popular home-grown investors and his strategy is well followed. more »

Growth Investing
3 Year Return: 51.8%
Naked Trader-esque Screen

Robbie Burns Naked Trader is a growth investing strategy based on the rules set out by Robbie Burns in his book, The Naked Trader: How Anyone Can Make Money Trading Shares. It uses a wide range of measures spanning growth, value and price momentum factors and focuses on small and mid-cap stocks. Burns also uses a number of non-financial, qualitative criteria in his investment analysis. He says: "I look at everything I can, and much of the research involves trying to pick out the negative things - I guess I'm trying to put myself off! I use every scrap of info I have to come to a decision - and so should you." Between 2002 and 2005, Burns wrote a column for the Sunday Times, 'My DIY Pension', and apparently doubled the money from £40,000 to £80,000 over this period. By mid-2011 he had turned this into £250,000. more »

Growth Investing
3 Year Return: 51.5%
Winning Growth & Income

Winning Growth & Income is a dividend investing strategy inspired by an approach used by American investment analyst Kevin Matras in his book, Finding #1 Stocks. It combines growth and dividend factors by sorting the market for high yielding companies with strong growth characteristics. Apart from a high yield, this strategy looks for companies with an above average return on equity, a below average price-to-earnings ratio and where analysts have been upgrading their earnings forecasts. It also looks for companies with a low beta (the sensitivity of a share price to the movement of the market). Kevin Matras says the screen works for investors that are "looking for good companies with solid revenues that pay a good dividend". In some respects, this strategy is a small cap version of the Large Cap Dividend Attraction strategy. In Matra's original strategy criteria he uses Zacks Rank, which is a metric for analysing analyst forecasts. more »

Income Investing
3 Year Return: 50.1%
Price Momentum Screen

Price Momentum is a momentum investing strategy first credited to research by academics Narasimhan Jegadeesh and Sheridan Titman in their paper, Returns to buying winners and selling losers. As its core measure it looks for the top 25% of stocks in the market ranked by their relative price strength over six and 12 months. Research into momentum strategies has shown that previously winning stocks have a tendency to keep rising in price over the medium term, while previous losers tend to keep falling. Academics and professionals have credited this anomaly to investors being slow to absorb the implications of positive news about stocks, which causes prices to drift up over time. In their 1993 paper, Jegadeesh and Titman wrote: "The strategy we examine in most detail, which selects stocks based on their past 6-month returns and holds them for 6 months, realises a compounded excess return of 12.01% per year on average." more »

Momentum Investing
3 Year Return: 41.2%
Dreman Low Price to Book Screen

This is a low Price to Book based on the writings of David Dreman. He champions a contrarian investment approach based on interpreting market psychology and using value measures to pick stocks that are out of favour with the market. Dreman invests in out-of-favour stocks, often in out-of-favour industries, that he identifies using relatively straightforward metric criteria. "I buy stocks when they are battered. I am strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favor stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time." Dreman warns that the Price to Book strategy in particular may lead to investing in loss-making stocks, at which one needs to be especially careful, and double-checking a company's financial strength is especially important. more »

Value Investing
3 Year Return: 39.6%
Growth at a Reasonable Price Screen

Growth at a Reasonable Price (GARP) is a strategy that aims to highlight companies that are growing but still reasonably priced by the market. It's an approach suggested by journalist and investor David Stevenson in his book, Smarter Stock Picking. It uses a combination of value, growth, quality and momentum measures. They include earnings-per-share growth, a below average price-to-earnings ratio, a high return on capital employed and a share price with positive relative strength. David Stevenson says: "At the core of GARP is is a simple desire: to benefit from a double whammy of growing earnings and a growing PE ratio that reflects this growth of earnings." more »

Growth Investing
3 Year Return: 39.5%
Richard Beddard's Nifty Thrifty Screen

Richard Beddard Nifty Thrifty is an investing strategy based on the approach of UK investor and journalist, Richard Beddard of Interactive Investor. It combines quality and value factors using Joel Greenblatt's Magic Formula and Joseph Piotroski's F-Score. The Magic Formula ranks stocks for value and quality using the earnings yield and return on capital as its key metrics. The F-Score is a 9-point checklist of financial health, of which stocks qualifying for this strategy must pass at least 5. Beddard said: "I don't really see how you can be an investor if you're not trying to understand businesses; how they make money, and what makes them go bust." Between June 2010 and December 2014, Beddard's own Nifty Thrifty portfolio had returned 47%. more »

Value Investing
3 Year Return: 38.1%
Value Momentum Screen

Value & Momentum is a strategy that aims to find undervalued stocks with positive price momentum. It is inspired by research by AQR Capital Management as well as the American Association of Individual Investors' "Value on the Move" screen and Jack Hough's "Impatient Value" screen in his book, Your Next Great Stock. The strategy combines value and momentum, which are two disciplines that have been found to work very effectively when combined. It looks for a reasonably low PEG, positive relative strength and a share price within 10% of its 52-week high in companies with sales of more than £100 million. Value and momentum not only provide strong returns but are also negatively correlated. That means that when when one strategy works well, the other lags - one zigs when the other zags. Over time, this helps to create a smoother profit line, as the volatility of each strategy cancels the other out. more »

Momentum Investing
3 Year Return: 36.9%
Best Dividends Screen

Best Dividends is an income strategy inspired by research into high yield investing by the American Association of Individual Investors. It is based on the premise that a stock's dividend yield will rise if its share price falls. The screen aims to identify which of these value shares is best placed to bounce back in price and be able to sustain dividend payouts. To do this it looks for a 5-year average yield of more than 5%, a track record of dividend growth and a conservative dividend payout ratio. It's an approach that echoes David Dreman's High Dividend value strategy. Dreman found that between 1970 and 2010 high yield stocks beat the market by nearly 1% and outperformed no or low yield stocks by 4%. more »

Income Investing
3 Year Return: 33.5%
Dividend Achievers Screen

Dividend Achievers is an income strategy inspired by an index run by Nasdaq OMX. It looks for companies that have grown their cash dividend payouts for at least the past five consecutive years. Apart from the dividend growth streak, this strategy looks for companies with reasonable share trading liquidity, strong cash reserves, a solid balance sheet and a proven record of consistent earnings growth. In his book Beating the Street, investing legend Peter Lynch, said: "The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 to 20 years in a row." According to M&G Investments, the total cumulative return from the S&P 500 in the 10 years to 2011, with dividends reinvested, was 32%. But the return soared to 136% by investing solely in US companies that had grown their dividends for at least 25 consecutive years. more »

Income Investing
3 Year Return: 31.0%
Earnings Surprise Screen

Earnings Surprise Momentum is a momentum investing strategy that was identified in research by academics Narasimhan Jegadeesh and Joshua Livnat in their paper, Revenue Surprises and Stock Returns. It specifically looks for companies that managed to significantly beat earnings and sales forecasts in their previous financial results. These 'earnings surprises' have been found to cause medium term increases in share prices. This is believed to be caused by analysts being slow to revise their forecasts and the market failing to adequately 'price-in' the better than expected results. Jegadeesh and Livnat found that the the top 20% of stocks in terms of upside earnings and sales surprises outperformed the market by 5.3%. They wrote: "Although analysts revise their forecasts of future earnings in response to revenue surprises, they are slow to incorporate fully the information in revenue surprises." more »

Momentum Investing
3 Year Return: 30.4%
Free Cash Flow Cows Screen

Free Cash Flow Cows is a deep value bargain strategy inspired by the investment writer, Jae Jun at Old School Value. It looks for companies that appear to be cheaply priced compared to the amount of free cash flow they generate. In particular, they should be stable, cash rich companies where free cash flow is actually growing. Among the ratios used in this strategy is Enterprise Value to Free Cash Flow and Free Cash Flow to Long Term Debt. Jae Jun says: "When it comes to true profitability, forget earnings and EBITDA. Free Cashflow is by far the best number to refer to." Jae Jun's backtesting of his own FCF Cows screen found that it beat the S&P 500 in six out of nine years between 2001 and 2009. more »

Bargain Stocks
3 Year Return: 29.6%
David Dreman Low PE Screen

David Dreman Low Price to Equity is a value strategy developed by the renowned US fund manager and author David Dreman in his book Contrarian Investment Strategies. It uses a basic value filter of selecting the cheapest 40% of the market by P/E ratio and filtering further for quality according to company size, financial strength and growth. Dreman favoured the P/E strategy above all others: "Our money management firm uses the low-PE method as it's core strategy, but also utilizes the other 3 contrarian strategies extensively." Dreman's studies showed that the cheapest 20% of the market by P/E outperformed the most expensive 20% by 6.7% annually. It should be cautioned that Dreman's portfolio did suffer in the 2008 financial crisis due to an overweighting of low P/E banks. Dreman though continues to evangelise the power of contrarian investing to counter behavioural biases. more »

Value Investing
3 Year Return: 28.1%
Josef Lakonishok Momentum Screen

Josef Lakonishok Momentum is a strategy that uses price and earnings momentum to identify undervalued companies just at the point when the market is starting to recognise them. It is inspired by detailed research by academic and fund manager Josef Lakonishok, who co-wrote the paper Contrarian Investment, Extrapolation, and Risk. The strategy combines value and momentum factors, including the price-to-earnings ratio, relative strength and earnings surprises. Lakonishok wrote: "Regardless of the reason, some investors get overly excited about stocks that have done very well in the past and buy them up, so that these 'glamour' stocks become overpriced. Similarly, they overreact to stocks that have done very badly, oversell them, and these out-of-favour 'value' stocks become underpriced." A Lakonishok-inspired strategy tracked by the American Association of Individual Investors returned 13.9% in the 10 years to the end of 2014, versus 5.4% for the S&P 500. more »

Momentum Investing
3 Year Return: 24.2%
Piotroski High F-Score Screen

The Piotroski F-Score Screen is a quality strategy outlined by the famed academic Professor Joseph Piotroski and investigated further in a 2011 paper titled "Identifying expectation errors in Value/Glamour stocks". The strategy hunts for the best quality shares in the market regardless of price. In this version of the screen we have selected the highest scoring stocks in the market using Piotroski's nine-point fundamental checklist called the F-Score. While the F-Score was originally used only for filtering value stocks, Piotroski discovered it was just as effective for filtering glamour stocks: "Firms experiencing the strongest improvement in fundamentals (FSCORE ?7) generate a mean size-adjusted return of 5.5 percent annually". What Piotroski essentially was saying was that the highest scoring stocks returned 5.5% more than the market - these findings have been backed up by independent research by Societe Generale. Perhaps as a result the F-Score has become extremely popular with investors and is a core component of the Stockopedia StockReports. more »

Quality Investing
3 Year Return: 19.0%
Dreman Low Price to Cash Flow Screen

David Dreman Low Price to Cashflow is a contrarian value strategy developed by the famous US investment manager and author David Dreman in his book Contrarian Investment Strategies. It uses a basic value filter of selecting the cheapest 40% of the market by Price to Cashflow ratio and filtering further for quality according to company size, financial strength and growth. Dreman favours cash flow over earnings: "If we take two companies with similar outlooks, markets, products, and management talent, the one with the higher cashflow will usually be the more rewarding stock. In investing, as in your personal finances, cash is king." Dreman's studies showed that the cheapest 20% of the market by P/CF outperformed the most expensive 20% by 6.8% annually. Dreman cautions towards a buy and hold approach because "transaction costs are often not recognized by investors, but can be very expensive". more »

Value Investing
3 Year Return: 18.2%
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