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Screening Strategies

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PYAD Screen

A combined value and income investing screen inspired by the writings of Stephen Bland on TMF (he also writes the Dividend Letter newsletter for MoneyWeek). It that starts by looking for: "P", i.e. a maximum Price to Earnings ratio of two-thirds that of the market (preferably much, much lower). It then looks for "Yield" preferably 50% above the market (although this is the most flexible criterion). "A" is for "Assets" as the screen looks for a Price to Book Value (P/BV) of under 1.  Finally, no Debt is the last criterion, preferably with stacks of net cash.  more »

Income Investing
1 Year Return: 8.9%
Buffettology-esque Historical Growth Screen

This screen seeks to replicate the approach of Warren Buffett,   arguably the most successful living investor - based on the summary/interpretation by Mary Buffett (a former daughter-in-law) in the best-selling book, "The New Buffettology".  In Chapter 13, Mary Buffett outlines a number of screening-type criteria entitled "Warren's Checklist for Potential Investments: His Ten Points of Light", which we summarise out below. Not all of these points are quantitative in nature, admittedly, but there's certainly the beginnings of a good Buffett screen, and one with a slightly different emphasis to that of the Buffett-Hagstrom screen. This version uses the Historical Growth method to calculate the "expected return". more »

Quality Investing
1 Year Return: 7.7%
Trading below Cash Screen

This screen is loosely based on the "Cash Index" approach outlined by James Altucher in his book, "Trade Like Warren Buffett". He suggests a multi-pronged approach to analysing potential bargain/arbitrage stocks in times of market distress (post 2001 bubble / Iraq War). First of all, he suggests that it's important to recognise that these stocks are likely to be trading for less than cash for a reason, namely the mar­ket thinks they will eventually declare bankruptcy. Some of the possible risks include: i) Inaccurate reflection of "cash on hand" in their books (leases, severance packages, etc), ii) Business model destined to fail, iii) Management with no incentive to return value to shareholders. To minimise risk of buying a turkey, Altucher looks for eight factors: i) Market cap below cash, ii) Very low leverage, iii) Enough cash headroom to cover the current annual burn-rate, and iv) some stability in revenues and earnings. In addition to these easily-screenable criteria, he suggested looking out for more qualitative factors: v) A reasonable belief that the sell-off in the stock was partly irrational, vi) Favorable arbitrage analysis - , i) Insider buying and viii) Institutional ownership.  more »

Bargain Stocks
1 Year Return: 7.1%
Dreman Low Price to Cash Flow Screen

David Dreman 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." more »

Value Investing
1 Year Return: 6.3%
Dividend Dogs (Forecast)

This is an income strategy made famous by Michael Higgins. It selects ten large cap stocks in a major market index with the highest dividend yield. It is a value strategy that seeks to gain from cheaply priced quality stocks that may be currently unfavoured by the market. This version uses the consensus forecast dividend yield, rather than the historic yield.   more »

Income Investing
1 Year Return: 6.1%
Piotroski F-Score Price to Book Value Screen

The Piotroski F-Score screen aims to identify deep bargain-bucket stocks that are in recovery.  Josef Piotroski, a finance professor, recognized that, while it has long been shown that bargain stocks (having a low Price to Book Value) have strong collective returns, there is very wide individual variability. “Embedded in that mix of companies, you have some that are just stellar. Their performance turns around [but] half of the firms languish; they continue to perform poorly and eventually de-list or enter bankruptcy.” What he wondered was whether it was possible to weed out the poor performers and identify the winners in advance. He therefore sought to develop a simple accounting-based scoring system for evaluating a stock’s financial strength. Piotroski's F-Score looks at value stocks, i.e. the bottom 20% of the market in terms of price to book value, and tests nine variables from a company’s financial statements. One point is awarded for each test that a stock passes. Piotroski regards any stocks that scored eight or nine points as being the strongest. more »

Value Investing
1 Year Return: 5.9%
Walter Schloss 'New Lows' Screen

A value investing screen based on Walter Schloss's dedicated focus on stocks that are hitting new lows and those trading at a price lower than their Book Value per Share.  Schloss summarized his own approach as being: “We want to buy cheap stocks based on a small premium over book value, usually a depressed market price, a record that goes back at least 20 years…and one that doesn’t have much debt. You can read more here. more »

Bargain Stocks
1 Year Return: 5.9%
Greenblatt's Magic Formula

This screen implements the Magic Formula value investing strategy pioneered by hedge fund manager, Joel Greenblatt. It is based on buying 20-30 "good, cheap companies" defined as having the best available combined MFI ranking in terms of Earnings Yield and a Return on Capital.  Greenblatt argues that return on capital is the best determinant of whether a business is a good one or not (companies that can earn a high ROC over time generally have a special advantage that keeps competition from destroying it, such as a unique business model). Earnings yield is his metric for 'cheapness'. Greenblatt believes that stock prices of a firm can experience “wild” swings even as the value of the company stays relatively constant giving investors opportunities to buy low and sell high. more »

Quality Investing
1 Year Return: 5.3%
Piotroski High F-Score Screen

Josef Piotroski came up with a simple nine criteria scoring system to help identify bargain stocks in recovery.  It is known as the F-Score and is used extensively throughout Stockopedia on Stock Reports and in screens as a measure of an improving financial health trend.  But while his now famous original strategy (which we have modelled here) focused on applying the F-Score filter to only the cheapest stocks in the market, other analysts have discovered that the highest F-Scoring companies in the market in aggregate also outperform.   We have filtered the market in this strategy to just highlight the companies showing a Piotroski F-Score of 9. more »

Quality Investing
1 Year Return: 4.4%
James O'Shaugnessy's Cornerstone Value

Cornerstone Value is a five criteria large-cap dividend yield-focused value screen outlined in James O'Shaughnessy’s seminal 1996 book What Works on Wall Street. His work showed that a large-caps stock portfolio with above average stock liquidity and cash flow per share which was ranked for high dividend yields performed best over the long term. Accordiing to his work, this value strategy outperformed the market producing an annual compound return of 15% from 1954 to 1996, compared to 8.3% for the S&P 500 Index (his Cornerstone Growth Strategy achieved 18% but with greater volatility). more »

Value Investing
1 Year Return: 4.1%
Buffettology-esque Sustainable Growth Screen

This screen seeks to replicate the approach of Warren Buffett,   arguably the most successful living investor - based on the summary/interpretation by Mary Buffett (a former daughter-in-law) in the best-selling book, "The New Buffettology".  In Chapter 13, Mary Buffett outlines a number of screening-type criteria entitled "Warren's Checklist for Potential Investments: His Ten Points of Light", which we summarise out below. Not all of these points are quantitative in nature, admittedly, but there's certainly the beginnings of a good Buffett screen, and one with a slightly different emphasis to that of the Buffett-Hagstrom screen. This version uses the Sustainable Growth method to calculate the "expected return". more »

Quality Investing
1 Year Return: 3.7%
Dividend Dogs

A dividend screen which envisages that an investor annually selects for investment the ten large cap stocks in the major market index whose dividend is the highest fraction of their price. This version uses the historic/actual yield.   Proponents of this strategy argue that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle.  more »

Income Investing
1 Year Return: 2.5%
James O'Shaugnessy Cornerstone Growth

The Cornerstone Growth Screen is a growth screen which combines relative strength, earnings growth and a price-to-sales value measure, as outlined in the third edition of James O'Shaughnessy’s seminal 1996 book What Works on Wall Street. According to his book, O'Shaughnessy found that his growth strategy outperformed the market producing an annual compound return of 18% from 1954 to 1996, compared to 8.3% for the S&P 500 Index (this beat his Cornerstone Value strategy which achieved 15%, although it was more volatile). more »

Growth Investing
1 Year Return: 0.4%
Benjamin Graham Deep Value Checklist

Towards the end of his life, Benjamin Graham developed a flexible checklist based formula that allowed investors to build portfolios of deep value stocks large or small. It was developed with aeronautical engineer, James Rea, shortly before he died. It's become known as "Graham's Last Will" and was the result of 50 years of backtests to highlight the top ten best performing stock selection criteria. more »

Value Investing
1 Year Return: 0.0%
52 Week High Momentum Screen

An investing screen based on buying stocks that are close to their 52 week high (and/or selling stocks that are close to their 52 week lows). Similar to other forms of momentum investing, this seems to work because investors tend to under-react to positive (or negative) information about those kinds of stocks. Researchers surmise that investors use the 52- week high as an “anchor” against which they value stocks, thus they tend to be reluctant to buy a stock as it nears this point regardless of new positive information. As a result, investors underreact when stock prices approach the 52-week high, and consequently, contrary to most investors' expectations, stocks near their 52-week highs tend to be systematically undervalued.  Finally, when information prevails and the 52 week high is broken, the market “wakes up” and prices see excess gains.   You can read more here. more »

Momentum Investing
1 Year Return: -0.0%
Quality Income Screen

In 2012, the team at Soc Gen introduced their so called ‘SG Quality Income Index’ - an index that aims to track stocks with strong fundamentals and good yields. Many in the market now appreciate that both higher ‘quality’ stocks and higher yielding stocks tend to outperform, but according to the research note, stocks that share both qualities put together standout total returns that have averaged 11.6% per year since 1990, more than doubling the return of the global equity markets at a significantly reduced volatility. But what is more striking is the return of the portfolio from when the market topped in 2000 to 2012 - a sideways market and a genuinely miserable time for all. While the total return of stock markets has actually been negative in that time period, the Quality Income index almost tripled. Read the full article. more »

Income Investing
1 Year Return: -0.6%
David Dreman High Dividend Screen

David Dreman 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."   more »

Value Investing
1 Year Return: -0.9%
Free Cash Flow Cows Screen

This screen is inspired by a similar screen devised and backtested here by the Old School Value blog for the US market. It looks for stable, cash rich companies growing their FCF, yet selling at a cheap multiple to FCF. Free cash flow is defined as cash from operations minus capital expenditure. The idea is that FCF is the ultimate driver of intrinsic value - the more FCF a company can generate and reduce debt, the higher the intrinsic value of the company becomes. more »

Bargain Stocks
1 Year Return: -1.6%
Negative Enterprise Value Screen

Some companies trade so cheaply that their cash balance is worth more than the company's enterprise value (i.e. the sum of the market cap and total long term debts).  This is known as a negative enterprise value (EV) and searching for such companies is a common bargain stock strategy. While, in theory, a negative EV may seem to be an easy arbitrage opportunity, whereby one could buy all of the debt and equity in a firm and use its cash balance to cover costs and keep the difference, there are a number of reasons to be cautious: Firstly, the enterprise value may not have captured all of the debt outstanding in the firm (e.g. the present value of lease commitments) and secondly the cash balance is from the balance sheet (rather than stated at the today's date used for the market cap). Given how quickly firms burn through cash, what you see on the balance sheet may not reflect what the firm has as of today as a cash balance so be careful! You can read more here. more »

Bargain Stocks
1 Year Return: -2.0%
Price Momentum Screen

A momentum screen based on buying prior winning stocks and selling short prior losers based on the empirical observation that Investments exhibit persistence in their relative performance. Buying winners inherently conflicts with the contrarian philosophy that is part and parcel of many successful investors. Nevertheless, it has long been noted by traders that good performing investments tend to continue to do so, whereas those that have performed relatively poorly tend to continue on the same path. This screen looks for high relative strength in the last six to twelve months compared with the market (top 25%) - relative strength doesn't work over short timeframes, such as one month. It excludes the most illiquid stocks, i.e. the bottom 25% of stocks based on market capitalisation. You can read more here.  more »

Momentum Investing
1 Year Return: -2.9%
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