O'Shaughnessy's Cornerstone Value Screen: Dividend Yields, Stock Liquidity and Cash Flow per Share

Saturday, Apr 16 2011 by
OShaughnessys Cornerstone Value Screen Dividend Yields Stock Liquidity and Cash Flow per Share

In Brief

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” 


O'Shaughnessy founded asset management firm O'Shaughnessy Capital Management, acquired by Bear Stearns in 2001. At Bear, he worked as director of systematic equity, where he was in charge of all quantitative investing for six years, leaving to go independent again at the end of 2007. The Cornerstone Value 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 tested a large number of simple value strategies (like high dividend yields, low price to earnings ratios, low price to book value ratios and low price to sales) plus a range of growth strategies. 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. O'Shaughnessy found that the value approach was better suited to the large cap universe than the all-stocks universe. The logic behind this is that a troubled large company is more likely to be able to recovery and continue to pay dividends than a smaller company in the same situation. The Cornerstone Value strategy 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. 

Does the Cornerstone Value Screen Work?

Accordiing to “What Works on Wall Street”, 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 (although his Cornerstone Growth Strategy achieved 18% but with greater volatility).

For more recent data, it is possible to track the subsequent performance of the mutual fund that O’Shaughnessy set up, subsequently sold to  Hennessy to become the Hennessy Cornerstone Value Fund (HFCVX). According to CXO Advisory Group, HFCVX has materially underperformed both its benchmark Russell 1000 Value Index and the S&P 500 Index over the decade to 2009.

“The fund underperformed the S&P…

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