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Screening Strategies

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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
3 Year Return: 11.4%
Piotroski F-Score Price to Earnings Value Screen

The Piotroski F-Score P/E is a value strategy developed by the renowned finance professor Joseph Piotroski, 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 best quality shares amongst a deep value basket. In this version of the screen, the cheapest 20% of the market by their P/E ratio are selected, and filtered further for the highest scoring companies using a nine-point fundamental checklist called the Piotroski F-Score. Piotroski developed the 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
3 Year Return: 11.0%
Greenblatt's Magic Formula

The Magic Formula is a value investing strategy invented by the hedge fund manager Joel Greenblatt in the bestselling and highly recommended Little Book that Beats the Market. It focuses on finding quality value stocks using a blended ranking system (the Magic Formula rank) composed from two fundamental ratios: Return on Capital (which Greenblatt argues is the best determinant of whether a business is a good one) and Earnings Yield (his favoured measure for cheapness). He summarised his philosophy with the maxim "buying cheap stocks at bargain prices is the secret to making lots of money". In the fourth edition of his book Greenblatt claimed the top scoring portfolio of 30 stocks appreciated by 30.8% each year over the previous 17 years, though he stressed that the strategy could underperform during periods of up to two years. Having now sold hundreds of thousands of copies, the "Magic Formula" is credited for reinvigorating the practice of value investing. more »

Quality Investing
3 Year Return: 8.7%
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
3 Year Return: 7.7%
Peter Lynch Growth Screen

Peter Lynch Growth is a growth investing strategy inspired by the approach of former Fidelity fund manager Peter Lynch, who wrote One Up on Wall Street. It looks for consistently profitable, relatively unknown, low-debt, reasonably priced stocks with high, but not excessive, growth. Among the criteria used, the strategy looks for stocks with a low price to earnings growth rate (PEG). Peter Lynch wrote: "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them." Lynch managed Fidelity's Magellan Fund between 1977 and 1990 and during the time racked up average annualised gains of close to 30%. He urged investors to adopt a bottom-up investing process and "buy what you know". more »

Growth Investing
3 Year Return: 6.6%
Quality Income Screen

Quality Income is a dividend strategy focused on firms with strong fundamentals and high yields, based on research by Societe Generale. It looks for quality income stocks using checklists for identifying strong financial health, low bankruptcy risk and high, but not excessive, yields. Specifically, firms must be capitalised at more than £800 million, have a Piotroski F-Score of more than 7 out of 9 and a strong Altman Z-Score. Yields are capped at 15% to avoid potential dividend traps.The SocGen team explains: "As a real asset class, we think Quality Income is an attractive alternative to anyone buying credit thinking that’s the only way to generate a high yield." SocGen found that quality income stocks produced standout total returns that averaged 11.6% per year since between 1990 and 2012, more than doubling the return of the global equity markets but with significantly reduced volatility. more »

Income Investing
3 Year Return: 5.8%
Dividend Dogs (Forecast)

Forecast Dividend Dogs of the FTSE is a high yield income strategy inspired by the popular 'Dogs of the Dow' approach of US investor Michael O'Higgins, who wrote 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 rolling 1-year forecast 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
3 Year Return: 5.5%
Buffettology-esque Historical Growth Screen

Warren Buffett Historical Growth is a quality investing strategy inspired by an interpretation of Warren Buffett's investment approach by Mary Buffett and David Clark in their book, The New Buffettology. It is a strategy that combines Buffett's focus on value and business quality. To work out whether the stock is reasonably valued, the strategy uses historical earnings growth; the higher that growth rate is, the more likely it is that the company has a durable competitive advantage. The strategy also looks for low debt and a high earnings yield, return on equity and return on capital employed. In The New Buffettology, Mary Buffett and David Clark explain: "Historical per share earnings that are both strong and show an upward trend indicate a durable competitive advantage." Remember, Buffett is famous for looking beyond financial measures when examining the quality of a business franchise. more »

Quality Investing
3 Year Return: 4.4%
Large Cap Dividend Attraction Screen

Large Cap Dividend Attraction is an income strategy discussed by Kevin Matras in his book, Finding Number 1 Stocks. It focuses on dividends paid by strong, large-cap companies with long track records of both earnings and dividend growth and where analysts are upgrading their earnings forecasts. This version of the strategy assesses 5-year dividend growth, Return on Equity, earnings per share growth and Price to Operating Cashflow. It also look for the highest percentage EPS upgrades over the past three months for the next financial year. Kevin Matras explains: "Larger companies with solid earnings, but without the aggressive growth rates that may have marked their earlier years, will often reward their investors by paying out a portion of their earnings as dividends." more »

Income Investing
3 Year Return: 3.0%
Philip Fisher Growth Screen

Philip Fisher Growth is a growth investing strategy inspired by the approach of legendary US investor Philip Fisher, who wrote Common Stocks and Uncommon Profits. The strategy is based on his 15 point checklist for finding growth stocks. It looks for a track record of strong sales growth, above average net margins and a low price-to-earnings growth rate over five years. Philip Fisher wrote: "If the right stocks are bought and held long enough they will always produce some profit. Usually they produce a handsome profit." His most famous investment was stock in Motorola, which he acquired in 1955 and held until his death, during which time the shares grew 20-fold. Philip Fisher's investment management firm is now headed by his son, the highly regarded value investor, Ken Fisher, whose stock picking strategy is also tracked by Stockopedia. more »

Growth Investing
3 Year Return: 1.9%
Benjamin Graham Deep Value Checklist

Benjamin Graham Deep Value Checklist is a value investing strategy based on rules suggested by legendary investor, Benjamin Graham, who wrote The Intelligent Investor. The strategy focuses on building portfolios of both large and small value stocks. It involves a 10-point checklist of valuation ratios and financial measures. Ben Graham regarded the most important of those measures to be earnings yield, dividend yield and for total debt to be less than book value. Ben Graham wrote: "Try to buy groups of stocks that meet some simple criterion for being undervalued - regardless of the industry and with very little attention to the individual company. It seems too good to be true, but all I can tell you after 60 years of experience, it seems to stand up under any of the tests I would make up." Societe Generale backtested the strategy to 1992 and found that the group of stocks scoring 9 and 10 on the list returned 37.1% and 48.7% per year respectively. Ben Graham devised the Deep Value Checklist late in his life as a much more systematic approach than his other value investing strategies. more »

3 Year Return: 0.0%
Cash Accruals Screen

Cash Accruals is a quality investing strategy inspired by research into the 'accrual anomaly' by American accounting professor Richard Sloan. In company accounts, accruals are adjustments made when revenues have been booked but cash has not yet been received. This screen uses low levels of accruals as a positive quality signal. It looks for companies with a low accrual ratio, where free cash flow is higher than net income and where earnings-per-share is growing. Professor Sloan's research found that: "...firms with relatively high levels of accruals experience negative future abnormal stock returns that are concentrated around future earnings announcements." The research found that companies with small or negative accruals vastly outperform (+10%) those with large accruals. It concluded that investors focus too heavily on earnings and not on cash generation and that the share prices of companies with high accruals are more likely to reverse in future years. more »

Quality Investing
3 Year Return: -0.2%
Buffettology-esque Sustainable Growth Screen

Warren Buffett Sustainable Growth is a quality investing strategy inspired by an interpretation of Warren Buffett's investment approach by Mary Buffett and David Clark in their book, The New Buffettology. It is a strategy that combines Buffett's focus on value and business quality. To work out whether the stock is reasonably valued, the strategy forecasts sustainable earnings growth; the higher that growth rate is, the more likely it is that the company has a durable competitive advantage. The strategy also looks for low debt and a growing earnings yield, return on equity and return on capital employed. In The New Buffettology, Mary Buffett and David Clark explain: "Consistency is everything. Warren is not after a company that occasionally has high returns on shareholders' equity, but one that consistently earns high returns." Remember, Buffett is famous for looking beyond financial measures when examining the quality of a business franchise. more »

Quality Investing
3 Year Return: -1.8%
Charles Kirkpatrick Value Screen

Charles Kirkpatrick Value is a strategy loosely based on the approach of US investment strategist & technician Charles Kirkpatrick, who wrote Beat the Market. It combines relative value, growth and momentum factors and is derived from Kirkpatrick's successful Growth Model. Concerned that growth strategies are susceptible to market downturns, Kirkpatrick devised a value approach that uses the price-to-sales ratio as a risk filter. This interpretation of the screen looks for the cheapest 30% of stocks based on price-to-sales, together with the top 20% of shares with the strongest 130-day Moving Average and then the top 10% with the strongest growth in operating profit. Kirkpatrick wrote: "When I read O'Shaughnessy's book What Works on Wall Street, I discovered from his tests that one way to potentially screen for risks initially was to use the price-to-sales ratio. Unlike O'Shaughnessy, who used the raw figure and set a limit, I used a relative calculation." Can we dig up any performance figures from his book? more »

Value Investing
3 Year Return: -2.2%
Earnings Upgrade Momentum Screen

Earnings Forecast Upgrades is a momentum strategy set out by US academics Phillip McKnight and Steven Todd in research that examined how analyst forecasts affect share prices. It focuses on finding momentum stocks by highlighting those that are receiving the highest levels of upgraded earnings forecasts from analysts. It looks at both the number of analysts that have raised their forecasts on a share over the past month, and the overall percentage earnings-per-share increase among the consensus of analysts. McKnight and Todd claimed: "Stocks with the greatest number of upwards revisions in earnings, net of downward revisions, earn significantly higher returns than otherwise similar stocks." The researchers examined a portfolio of European shares and found that the 20% with the highest net upward revisions outperformed the lowest 20% by over 16% a year. Earnings upgrades are one way of finding stocks with 'earnings momentum'; those that have received upward earnings revisions are likely to do so again in the future. more »

Momentum Investing
3 Year Return: -2.9%
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
3 Year Return: -3.9%
Benjamin Graham Net Nets Screen

Benjamin Graham Net Nets Bargain is a demanding deep value 'bargain' investing strategy based on rules suggested by legendary investor, Benjamin Graham, who wrote The Intelligent Investor. This value approach looks for stocks that are trading at such a cheap price that you could buy the whole company and sell off all the assets at a profit with near minimal risk. It does that by finding shares with a market capitalisation of less than net net working capital. The calculation makes allowances for the fact that in a fire sale of assets, only a proportion of owed cash and inventory value would be recovered. Ben Graham explained: "No proprietor or majority holder would think of selling what he owned at so ridiculously low a figure? In various ways practically all these bargain issues turned out to be profitable and the average annual result proved much more remunerative than most other investments." Remember, risky and potentially troubled companies will be found using the Net Net rules. Ben Graham suggested diversifying between at least 30 stocks. more »

Bargain Stocks
3 Year Return: -5.8%
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
3 Year Return: -13.4%
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
3 Year Return: -13.4%
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
3 Year Return: -17.7%
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