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Screening Strategies

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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
6 Month Return: -12.3%
Muhlenkamp's ROE Screen

This screen essentially looks for high ROEs at a reasonable price. Ronald Muhlenkamp is a renowned US investor and founder and president of the Muhlenkamp mutual fund. The Muhlenkamp fund averaged a 10.4% annual rate of return over the last 10 years to 2004 while the S&P 500 has returned 8.5%. His approach involves searching for companies with ROEs above the historic average for all companies (c. 14% for US companies since WW2) . In additions, ROEs should have remained stable over the last five years and the Company should be well-priced according to the PE Ratio. The strategy looks for companies with higher earnings growth than that of their industry peers. One should also look at profit and cost control via a factor such as the operating or net profit margin of the firm relative to its industry. The strategy also looks at financial stability, both through liabilities as a ratio to assets and the amount of free cash of the firm. You can read more about Muhlenkamp's investment philosophy here. and here more »

Quality Investing
6 Month Return: -15.4%
Charles Kirkpatrick Bargain Screen

Kirkpatrick’s Bargain Screen combines the best triggers found in his testing of relative value, relative reported earnings growth. Kirkpatrick's testing of relative price-to-sales ratio percentile rankings indicated optimal performance in percentiles greater than 17 but not higher than the 42nd percentile. For relative strength, he found that setting the bar at the 90th percentile resulted in too many passing companies to manage in a portfolio. To reduce the number of passing companies to just 20, Kirkpatrick upped the requirement to only include companies in the 97th percentile or higher. Initial testing of the Bargain Model was promising but Kirkpatrick conceded that several more years of testing were needed before labeling it a successful stock selection methodology. You can read more here. more »

Bargain Stocks
6 Month Return: -15.9%
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
6 Month Return: -16.3%
Peter Lynch Growth Screen

This is a 'fast growers' screen which looks for consistently profitable, relatively unknown, low-debt, reasonably priced stocks with high, but not excessive, growth. Mr. Lynch developed his investment philosophy at Fidelity, and gained his considerable fame managing Fidelity's Magellan Fund. His selection approach is strictly a bottom-up "buy what you know" one. He suggested focusing on companies familiar to the investor, applying fundamental analysis which emphasizes a thorough understanding of the company, its prospects, its competitive environment, and whether the stock can be purchased at a reasonable price.  It’s frankly impossible to come up with a screen that exactly replicates Lynch’s multi-faceted investing strategy. Nevertheless, the following approach seeks to emulate some of the key elements of his search for “fast growers”. You can read more here. more »

Growth Investing
6 Month Return: -17.9%
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
6 Month Return: -18.1%
Charles Kirkpatrick Value Screen

Kirkpatrick’s Value Screen combines quantitative filters for relative price strength and relative reported earnings growth, with a value criterion - using relative price-to-sales percentiles, Kirkpatrick arbitrarily selected only those stocks in the 30th percentile or lower. Despite the success of his Growth Model, Kirkpatrick was concerned about the fact that its performance had occurred during one of the strongest bull markets in history. He wanted to strengthen the system against capital loss to protect against the inevitable market reversal. He believed relative price strength would not be effective during a market downturn and could lead to significant capital losses. For Kirkpatrick, the alternative was to reduce the risk of the portfolio by beginning with a group of stocks with low valuations. Kirkpatrick also looks for growth companies with market capitalizations of at least $500 million and share prices of at least $10. You can read more here. more »

Value Investing
6 Month Return: -19.9%
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