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Screening Strategies

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James Montier 'Unholy Trinity' Screen

James Montier Unholy Trinity is a three point short selling strategy inspired by research by economist and equity strategist James Montier called Joining The Dark Side: Pirates, Spies and Short Sellers The approach uses three risk factors to identify stocks that might be overvalued, financially weak and poorly managed. It uses the price-to-sales ratio to find companies that appear to be overvalued based on their revenues. It looks for signs of low quality by finding stocks that score less than 3 out of 9 on the Piotroski F-Score of financial health. Finally, Montier looks for companies where asset growth could be excessive, based on the theory that management tend to be wasteful allocators of capital. James Montier wrote: "It never ceases to amaze me that whenever a major corporate declines the short sellers are suddenly painted as financial equivalents of psychopaths. This is madness, rather than examining the exceptionally poor (and sometimes criminal) decisions that the corporate itself took, the short sellers are hauled over the coals." Montier found that between 1985 and 2007 a portfolio of Unholy Trinity stocks rebalanced annually would have declined over 6% p.a. compared to a market that was rising at the rate of 13% p.a. in Europe. Short selling shares can be very risky but the Unholy Trinity can still be used as an indicator of which stocks should be avoided. more »

Short Selling
6 Month Return: 4.5%
Warren Buffett - Hagstrom Screen

Warren Buffett - Hagstrom is a quality investing strategy inspired by modelling of Warren Buffett's investment approach in books by investment strategist Robert Hagstrom, including The Warren Buffett Way. It is a strategy that combines Buffett's focus on value and business quality. It uses price-to-free cash flow as a valuation measure and assesses quality using operating profit and return on equity. In his book, Robert Hagstrom explains: "Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now." Remember, Buffett is famous for looking beyond financial measures when examining the quality of a business franchise. more »

Quality Investing
6 Month Return: 4.3%
Richard Driehaus Screen

Richard Driehaus Momentum is a momentum investing strategy inspired by an approach used by US investor Richard Driehaus. It combines a focus on price and earnings momentum in small and mid-cap companies with strong, sustained earnings growth. Importantly, Driehaus wanted to find companies that had produced significant earnings surprises over the previous year by beating analyst forecasts. Driehaus said: "I would much rather invest in a stock that's increasing in price and take the risk that it may begin to decline than invest in a stock that's already in a decline and try to guess when it will turn around." Driehaus's fund management firm Driehaus Capital Management was reported to have delivered compound annual returns of 30% during the 12 years after it was started in 1980. Driehaus was named in Barron's "All-Century" team of the 25 most influential and powerful mutual fund managers in 2000. more »

Momentum Investing
6 Month Return: 3.2%
Piotroski F-Score Price to Book Value Screen

The Piotroski F-Score P/B is the classic value strategy by famous finance academic Joseph Piotroski. Originally published in a 2000 research paper titled "Value Investing: The use of historical financial statement information to separate winners from losers", the strategy hunts for the highest quality shares amongst a deep value basket. In this version of the screen, the cheapest 20% of the market by their Price to Book ratio are first selected, and filtered further to find those with the most improving fundamental health trends using the Piotroski F-Score. Piotroski developed the F-Score system after observing that: "In that mix of bargain companies, you have some that are just stellar. Their performance turns around. People become optimistic about the stock, and it really takes off. However half of the firms languish; continue to perform poorly and eventually delist or enter bankruptcy." Piotroski's back-tests over 20 years showed that his formula could improve the returns from typical value investing strategies by at least 7.5% annually and is especially effective amongst small caps. Investors should beware the low liquidity shares in this screen can be expensive to trade. more »

Value Investing
6 Month Return: 3.1%
Bill Miller Contrarian Value Screen

Bill Miller Contrarian Value is a value investing strategy based on the style of US fund manager, Bill Miller. It uses value and growth factors to find stocks that are trading below their intrinsic value but are capable of rebounding. This model of Miller's contrarian approach uses price-to-free cash flow as a valuation measure but also looks at the price-to-earning growth factor (PEG) as well as sales and free cash flow growth. Miller wrote: "We are value investors because we are persuaded of the logic of buying shares of businesses when others want to sell them, and we understand that lower prices today mean higher future rates of return, and high prices today mean lower future rates of return." Between 1991 and 2005 Miller cemented his legendary reputation by guiding the Legg Mason Value Trust to a record 15 consecutive years of beating the S&P 500. more »

Value Investing
6 Month Return: 2.9%
Neglected Firms Screen

Neglected Firms is a value investing strategy inspired by Ludwig Chincarini and Daehwan Kim in their book, Quantitative Equity Portfolio Management. It uses value and quality measures to find neglected shares that are under-researched by analysts and potentially misunderstood by investors. It looks for companies with low analyst coverage, above average earnings growth and that are cheaply priced according to their price-to-earnings and price-to-book ratios. Chincarini and Kim explain: "It is likely that neglected firm's stock prices do not reflect all the relevant information available and that their prices will react sluggishly to relevant news. This opens a window of time and opportunity for an astute investor to purchase undervalued, neglected stocks and reap the rewards when the market recognizes the stocks' true values." Academic research by Avner Arbel and Paul Strebel found that between 1972 and 1976 comparatively neglected S&P stocks easily outperformed those that were well researched. more »

Value Investing
6 Month Return: 2.7%
John Templeton Bargain Screen

John Templeton Value is a value investing strategy based on the rules used by US investor Sir John Templeton. It combines value and growth factors to identify stocks trading at cheap prices but with a positive long-term outlook. The value components include the price-to-book and price-to-earnings ratios, while the growth rules focus on strong earnings and margins, and low debt. Sir John wrote: "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell." His Templeton Growth Fund delivered a 13.8% annualised return from 1954 to 2004, versus 11.1% by the S&P 500 over the same period. Sir John also put a great deal of importance on qualitative factors, such as quality products, cost controls, and the intelligent use of earnings by management. more »

Value Investing
6 Month Return: 2.2%
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
6 Month Return: 2.1%
Earnings Downgrade Momentum Screen

Earnings Forecast Downgrades is a short selling and red flag strategy identified in a research paper by academics Philipp McKnight and Steven Todd, called Analyst Forecasts and the Cross Section of European Stock Returns. It looks for stocks experiencing earnings forecast downgrades by analysts as a potential trigger of negative momentum. They found that the positive returns from an earnings upgrade portfolio were large and persistent, whereas the sell portfolio generated a near zero return because bad news was quickly 'priced-in'. While the strategy on its own may be difficult to profit from, it still highlights stocks that should perhaps be avoided, or warrant careful additional research. McKnight and Todd wrote: "We find differences in the return continuation patterns of stocks with upward versus downward revisions, namely, bad news travels quickly, but good news travels slowly." more »

Short Selling
6 Month Return: 1.6%
Charles Kirkpatrick Bargain Screen

Charles Kirkpatrick Bargain is a rules based strategy inspired by US investment strategist Charles Kirkpatrick's work in his excellent Beat the Market. Kirkpatrick has established strategies for finding growth and value stocks. His bargain strategy concentrates on value and momentum factors, with a very precise requirement for the price to sales ratio. Kirkpatrick's testing of of relative price-to-sales ratio rankings found that it was most effective between the 17th and 42nd percentiles in terms of cheapness. Initial testing of the Bargain Model was promising but Kirkpatrick said that several more years of testing were needed before labeling it a success. Kirkpatrick wrote: "As a result of these studies of relative selection methods, I decided to create a new list, called the 'Bargain List' that would incorporate the best triggers found so far and would only include value and price strength." more »

Bargain Stocks
6 Month Return: 0.9%
Benjamin Graham Enterprising Investor Screen

Benjamin Graham Enterprising Investor is a deep value investing strategy based on rules suggested by legendary investor, Benjamin Graham, who wrote The Intelligent Investor. The strategy focuses on value stocks and the ability to buy them with a significant margin of safety. It uses valuation ratios including price-to-earnings and price-to-book but also looks for a history of earnings growth and dividend payouts. Ben Graham once said: "The determining trait of the enterprising investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average." Enterprising Investor is a less strict approach than Ben Graham's defensive strategies, which often focus on large, well financed and profitable companies. Instead, it looks for unpopular companies, special situations and 'bargain' issues. more »

Value Investing
6 Month Return: 0.6%
Dividend Dogs

Dividend Dogs of the FTSE is a high yield income strategy based on an approach devised by US investor Michael O'Higgins in his book Beating the Dow. It simply selects the 10 highest yielding stocks in a major market index like the FTSE 100, the S&P 500 or the FTSE Eurofirst 300. This version of the strategy uses the current, or historic, dividend yield. It's main safety net is that blue-chip stocks tend to be large, mature and well financed companies with long histories of weathering economic turmoil. O'Higgins wrote: "Beating the Dow is based on simple logic that will produce exceptional returns in any rational market and until excessive popularity turns contrarianism into conventional wisdom." O'Higgins suggested rebalancing the Dividend Dogs portfolio once per year, based on the highest yields available. more »

Income Investing
6 Month Return: 0.4%
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
6 Month Return: 0.1%
R&D Breakthroughs Screen

R&D Breakthroughs is a quality investing strategy inspired by a screen devised by US journalist Jack Hough, in his book, Your Next Great Stock. It is partly based on research by Louis Chan, Josef Lakonishok and Theodore Sougiannis in paper called The Stock Market Valuation of Research and Development Expenditures. The strategy filters a value screen with quality factors related to how much a company is investing in its future development. It uses the price-to-research ratio to find value and compares R&D investment in relation to growth, sales and assets. The strategy seeks to identify research-led businesses that are investing significantly in future development in order to try to identify their potential future growth before the market does. Louis Chan wrote: "The clearest evidence that high R&D plays a distinctive role arises from stocks with high R&D relative to the market value of equity. Their average return over the following three years is 6.12% per year." more »

Quality Investing
6 Month Return: -2.1%
James Montier 'Cooking the Books' Screen

James Montier Cooking the Books is a short selling strategy based on research by economist and equity strategist James Montier. It uses Low Quality criteria to identify stocks that could be at risk of bad accounting practice. The 6-point C-Score checklist looks at the divergence between net income and cash-flow, increasing days sales outstanding, increasing days sales of inventory, increasing current assets to revenues, declining depreciation relative to property, plant and equipment and high total asset growth. Montier found that the C-Score was even more effective when used to assess stocks that look over-valued on a price-to-sales ratio basis. James Montier wrote: "In good times, few focus on such 'mundane' issues as earnings quality and footnotes. However, this lack of attention to 'detail' tends to come back and bite investors in the arse during bad times." Montier found that stocks with a C-score of 5 and a price-to-sales ratio of greater than 2 tend to generate a negative absolute return of 4% per year. Short selling shares can be very risky but the C-Score can still be used as an indicator of which stocks should be avoided. more »

Short Selling
6 Month Return: -2.2%
James O'Shaugnessy's Cornerstone Value

James O'Shaughnessy Cornerstone Value is a value investing strategy presented by US fund manager James O'Shaughnessy in his 1996 book, What Works on Wall Street. His extensive backtesting found that value investing works particularly well with large capitalisation stocks with above average sales and cashflow, high levels of share liquidity, which were then sorted for the highest dividend yield. O'Shaughnessy said: "Generally speaking, when things are going against you, as they inevitably will, you have to stick to the underlying strategy? Only by doing so will you be around for when it comes rebounding back." He found that this value strategy produced an annual compound return of 15% between 1954 and 1996, compared to 8.3% for the S&P 500 index. O'Shaughnessy has continued to conduct detailed analysis of Standard & Poor's Compustat database to identify the most effective investing strategies. more »

Value Investing
6 Month Return: -2.8%
Benjamin Graham NCAV Bargain Screen

Benjamin Graham NCAV Bargain is a deep value 'bargain' investing strategy based on rules suggested by legendary investor, Benjamin Graham, who wrote The Intelligent Investor. This is a simple value approach that looks for companies with a market capitalisation that is less than their net current asset value. NCAV is the calculation of current assets minus current liabilities. Ben Graham wrote: "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." In a study by Henry Oppenhemier in the Financial Analysts Journal, the mean return from discounted net current asset stocks over a 13-year period was 29.4% per year versus 11.5% per year for the NYSE-AMEX Index. Ben Graham advocated buying stocks that, if they were to collapse tomorrow, should still produce a positive return because of the underlying asset backing. To reduce exposure to individual failures, he also looked for a margin of safety of about 33% and suggested diversifying between at least 30 stocks. more »

Bargain Stocks
6 Month Return: -3.1%
John Neff Value Screen

John Neff Value is a value investing strategy based on the rules of successful US fund manager John Neff. It combines demanding value criteria with elements of growth, quality and dividend income. Although he didn't like the term, Neff was a contrarian investor buying good companies with moderate growth and high dividends while out of favour, and selling them once they rose to fair value. One of the tools used by Neff is the Total Return Ratio, which is calculated using the price-to-earnings growth factor (PEG), but adjusted for dividend yield - PEGY. John Neff wrote: "If you buy stocks when they are out of favor and unloved, and sell them into strength when other investors recognize their merits, you'll often go home with handsome gains." During his tenure as manager of Vanguard's Windsor Fund between 1964 and 1995, Neff's average annual total return was 13.7%. more »

Value Investing
6 Month Return: -4.4%
David Dreman High Dividend Screen

David Dreman High Dividends is a contrarian high yield strategy championed by the renowned US fund manager and author David Dreman in his book Contrarian Investment Strategies. Dreman favoured buying out of favour value stocks with straightforward filters for quality. In this version of the screen we filter for higher yielding shares with strong financial positions, as many favourable operating and financial ratios as possible, with above average earnings growth. Dreman explains: "High yielding stocks provide you with the best protection in a bear market. These stocks give the dividend oriented investor more protection of principal on the downside and provide both rising dividend income as well as capital appreciation." Dreman's studies showed that the highest quintile of dividend paying stocks in the market outperformed those with low or no dividends by 4% annually, with half of the returns coming from the dividends themselves. He cautioned that "buying stocks with high dividend yields beats the market, but provides lower total returns than his other contrarian strategies". Dreman runs the firm Dreman Value Management and continues to research and write on contrarian and behavioural investing. more »

Value Investing
6 Month Return: -4.5%
Benjamin Graham Defensive Investor Screen

Benjamin Graham Defensive Investor is a demanding, deep value 'bargain' investing strategy based on rules suggested by legendary investor, Benjamin Graham, who wrote The Intelligent Investor. The strategy focuses on value stocks with good quality financial characteristics. It uses price-to-earnings as a valuation measure and looks for larger companies with a consistent track record of earnings and dividend growth, manageable debt and a high current ratio. Ben Graham wrote: "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." Defensive Investor is a stricter approach than Ben Graham's enterprising strategy, which look for unpopular companies, special situations and 'bargain' issues. more »

Bargain Stocks
6 Month Return: -5.7%
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