O'Shaughnessy's Cornerstone Growth Screen: Beating the Market through Relative Strength and Price to Sales

Saturday, Apr 16 2011 by
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OShaughnessys Cornerstone Growth Screen Beating the Market through Relative Strength and Price to Sales

In Brief

The Cornerstone Growth Screen is an impressive growth screen which combines relative strength, earnings consistency and a price-to-sales value measure.

Background 

O'Shaughnessy wrote the seminal 1996 book "What Works on Wall Street”. In it, the Cornerstone Growth stock screener implements a strategy he developed in the 1990s using Standard & Poor's Compustat database to back-test the performance of dozens of stock-picking strategies between 1954 and 1996.

He was the first to test over such a long period a large number of simple growth screens like high profit margins, high return on equity, high one year and five year earnings growth and high relative strength. His conclusion was that, with the exceptions of relative strength and earnings growth, most simple growth strategies did not compensate investors adequately for the risks involved. After studying the results, O'Shaughnessy came up with his own formula called the "United Cornerstone" strategy. This approach is a combination of two models: a momentum/earnings growth-focused method called "Cornerstone Growth" and a value-focused method called "Cornerstone Value.". His conclusions were published in the book, What Works on Wall Street”, an in-depth quantitative stock market study and bestseller.

Does the Cornerstone Growth Screen Work?

According to “What Works on Wall Street”, 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 value strategy which achieved 15%, although it was more volatile). 

For more recent data, it is possible to track the subsequent performance of the mutual fund that O’Shaughnessy set up and subsequently sold to Neil Hennessy to become the Hennessy Cornerstone Growth Fund (HFCGX). According to  CXO Advisory Group, unlike its sibling Value Fund, HFCGX materially outperformed both its benchmark Russell 2000 Index and the S&P 500 Index in the past decade:

“The fund outperformed the S&P 500 Index by about 5% per year, compared to the backtested average annual outperformance of about 10%. Its slightly higher standard deviation of annual returns (23.1% versus 21.4% for the Russell 2000 Index) seems not to offset the benefit of the higher return”. 

The American Association of Individual Investors also present some more recent performance data for this screen, showing an 18% return vs. 0.7% for the S&P 500 over the last decade (as…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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