R&D Breakthroughs Screen: getting a jump on the growth investors?

Friday, Mar 09 2012 by

We thought we’d spend some time discussing one of the most obscure screens amongst the Quality stock screen category, R&D Breakthroughs Screen. It’s a stock selection strategy that seeks to match up companies with cheap share prices compared to what they are spending on R&D.

Why this one?

Well, we’ve not really covered it before and frankly it has been going like a rocket ever since we started tracking its performance along with the other screens on December 15. It’s enjoyed a 25.80% gains vs. 7.9% for the FTSE 100, with a -2.85% maximum drawdown. That makes it the third best performing of all 61 of our screens, closely following the leader, earnings upgrade momentum (see here for a list of all the screens sorted by their performance to date).

What's this Screen all about? 

This screen is designed to find potential growth stocks before the market catches on. It does it by seeking out attractively priced shares and applying some neat accounting analysis to see which ones are spending the most on research and development. The metrics involved are inspired by a screen developed by US investment commentator and author of Your Next Great Stock, Jack Hough, and the theory behind it is supported by substantial academic and professional research.

First, the theory. The screen leans heavily on the phenomenon that stock mispricing can easily occur because of the way that companies account for R&D. Given the choice, most firms would prefer to book their R&D expenses as capital investments on the basis that they are hoping that R&D will eventually lead to some profitable conclusion further down the line. By booking these costs as an investment it would qualify them as intangible assets, which could then be depreciated over a period of time. In some cases, companies do book ‘development’ as an intangible but they have to regularly vouch for each project being commercially viable. What ends up happening in a lot of cases – because of accounting and tax rules – is that R&D has to be booked as an expense (much the same as computers, entertaining and paperclips) in the year it occurs.

What is important about this situation is that heavy R&D costs can weigh against company earnings, which inevitably drags down the share price. So a company may be investing hard on future development that will hopefully…

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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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6 Comments on this Article show/hide all

ceejay9 3rd Aug '17 1 of 6

Share price graphs do not appear to support the conclusions!

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underscored 3rd Aug '17 2 of 6

In reply to post #204595

Puricore did not perform from this post in 2012, pace got bought out at a substantial premium and gw is a four bagger

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ceejay9 4th Aug '17 3 of 6

Heck of a lot of price crashes in those graphs! In my experience market does not value R&D expenditure, but sees 'investment' as same as 'money down the drain'. Maybe come right in longer term - if survive bankruptcy due to financiers pulling rug out from under and leaving shareholders out in the cold.

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HumourMe 4th Aug '17 4 of 6

I got excited about the great drawdown until I realised that this was 'recent'. Since inception it has had major reversals as well as major gains, both for sustained periods. For me minimising drawdown is on parity with returns as I'm much more likely to stick with a strategy that avoids big drawdowns.

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peterthegreat 25th Jan '18 5 of 6

Just checking that I understand the graph correctly. It appears to me that this screen produced a return of approximately zero for the first 4.5 years and then over the subsequent 18 months produced a return of over 600%. Have I misunderstood something or are the results really this volatile?

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MarkLDN 29th Jan '18 6 of 6

In reply to post #304508

13% annualised - not bad! As for volatility, that would only be natural in the R&D space.

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