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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
5 Year Return: 53.7%
Piotroski High F-Score Screen

The Piotroski F-Score Screen is a quality strategy outlined by the famed academic Professor Joseph Piotroski and investigated further in a 2011 paper titled "Identifying expectation errors in Value/Glamour stocks". The strategy hunts for the best quality shares in the market regardless of price. In this version of the screen we have selected the highest scoring stocks in the market using Piotroski's nine-point fundamental checklist called the F-Score. While the F-Score was originally used only for filtering value stocks, Piotroski discovered it was just as effective for filtering glamour stocks: "Firms experiencing the strongest improvement in fundamentals (FSCORE ?7) generate a mean size-adjusted return of 5.5 percent annually". What Piotroski essentially was saying was that the highest scoring stocks returned 5.5% more than the market - these findings have been backed up by independent research by Societe Generale. Perhaps as a result the F-Score has become extremely popular with investors and is a core component of the Stockopedia StockReports. more »

Quality Investing
5 Year Return: 50.0%
Earnings Surprise Screen

Earnings Surprise Momentum is a momentum investing strategy that was identified in research by academics Narasimhan Jegadeesh and Joshua Livnat in their paper, Revenue Surprises and Stock Returns. It specifically looks for companies that managed to significantly beat earnings and sales forecasts in their previous financial results. These 'earnings surprises' have been found to cause medium term increases in share prices. This is believed to be caused by analysts being slow to revise their forecasts and the market failing to adequately 'price-in' the better than expected results. Jegadeesh and Livnat found that the the top 20% of stocks in terms of upside earnings and sales surprises outperformed the market by 5.3%. They wrote: "Although analysts revise their forecasts of future earnings in response to revenue surprises, they are slow to incorporate fully the information in revenue surprises." more »

Momentum Investing
5 Year Return: 47.8%
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
5 Year Return: 45.9%
Value Momentum Screen

Value & Momentum is a strategy that aims to find undervalued stocks with positive price momentum. It is inspired by research by AQR Capital Management as well as the American Association of Individual Investors' "Value on the Move" screen and Jack Hough's "Impatient Value" screen in his book, Your Next Great Stock. The strategy combines value and momentum, which are two disciplines that have been found to work very effectively when combined. It looks for a reasonably low PEG, positive relative strength and a share price within 10% of its 52-week high in companies with sales of more than £100 million. Value and momentum not only provide strong returns but are also negatively correlated. That means that when when one strategy works well, the other lags - one zigs when the other zags. Over time, this helps to create a smoother profit line, as the volatility of each strategy cancels the other out. more »

Momentum Investing
5 Year Return: 40.9%
Richard Beddard's Nifty Thrifty Screen

Richard Beddard Nifty Thrifty is an investing strategy based on the approach of UK investor and journalist, Richard Beddard of Interactive Investor. It combines quality and value factors using Joel Greenblatt's Magic Formula and Joseph Piotroski's F-Score. The Magic Formula ranks stocks for value and quality using the earnings yield and return on capital as its key metrics. The F-Score is a 9-point checklist of financial health, of which stocks qualifying for this strategy must pass at least 5. Beddard said: "I don't really see how you can be an investor if you're not trying to understand businesses; how they make money, and what makes them go bust." Between June 2010 and December 2014, Beddard's own Nifty Thrifty portfolio had returned 47%. more »

Value Investing
5 Year Return: 37.3%
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
5 Year Return: 34.3%
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
5 Year Return: 33.9%
52 Week High Momentum Screen

52 Week High Momentum is momentum strategy that was explored in a paper called The 52-Week High and Momentum Investing by academics Thomas George and Chuan-Yang Hwang. It capitalises on the positive momentum effect which appears to cause stocks that are at, or close to, their 52 week high prices continuing to outperform. It is believed to work because investors tend to under-react to positive news about previously successful stocks and are reluctant to bid their prices higher, even if the positive news warrants it. When the full impact of the information prevails, and the 52 week high is broken, the market "wakes up" and prices see further gains. George and Hwang wrote: "Our results indicate that the 52-week measure has predictive power whether or not individual stocks have had extreme past returns. This suggests that price level is important, and is consistent with an anchor-and-adjust bias." The original research found that, between 1963 - 2001, the average monthly gain to this strategy assuming a 6 month hold was 0.45% - "about twice as large as those associated with other momentum strategies". more »

Momentum Investing
5 Year Return: 31.0%
James O'Shaugnessy Cornerstone Growth

James O'Shaughnessy Cornerstone Growth is a growth investing strategy devised by US fund manager James O'Shaughnessy in his 1996 book, What Works on Wall Street. It combines value, momentum and growth factors, using the price-to-sales ratio, price momentum and earnings growth as its main rules. O'Shaughnessy wrote: "Marrying good value characteristics with price momentum is an excellent way to find 'cheap stocks on the mend'." He found that this strategy produced an annual compound return of 17% between 1963 and 2009. In 2012, O'Shaugnessy updated the strategy rules by replacing price-to-sales as the key value metric with 6 composited value factors. more »

Growth Investing
5 Year Return: 28.0%
Dreman Low Price to Book Screen

This is a low Price to Book based on the writings of David Dreman. He champions a contrarian investment approach based on interpreting market psychology and using value measures to pick stocks that are out of favour with the market. Dreman invests in out-of-favour stocks, often in out-of-favour industries, that he identifies using relatively straightforward metric criteria. "I buy stocks when they are battered. I am strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favor stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time." Dreman warns that the Price to Book strategy in particular may lead to investing in loss-making stocks, at which one needs to be especially careful, and double-checking a company's financial strength is especially important. more »

Value Investing
5 Year Return: 20.1%
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
5 Year Return: 18.7%
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
5 Year Return: 16.9%
David Dreman Low PE Screen

David Dreman Low Price to Earnings is a value strategy developed by the renowned US fund manager and author David Dreman in his book Contrarian Investment Strategies. It uses a basic value filter of selecting the cheapest 40% of the market by P/E ratio and filtering further for quality according to company size, financial strength and growth. Dreman favoured the P/E strategy above all others: "Our money management firm uses the low-PE method as it's core strategy, but also utilizes the other 3 contrarian strategies extensively." Dreman's studies showed that the cheapest 20% of the market by P/E outperformed the most expensive 20% by 6.7% annually. It should be cautioned that Dreman's portfolio did suffer in the 2008 financial crisis due to an overweighting of low P/E banks. Dreman though continues to evangelise the power of contrarian investing to counter behavioural biases. more »

Value Investing
5 Year Return: 15.3%
Naked Trader-esque Screen

Robbie Burns Naked Trader is a growth investing strategy based on the rules set out by Robbie Burns in his book, The Naked Trader: How Anyone Can Make Money Trading Shares. It uses a wide range of measures spanning growth, value and price momentum factors and focuses on small and mid-cap stocks. Burns also uses a number of non-financial, qualitative criteria in his investment analysis. He says: "I look at everything I can, and much of the research involves trying to pick out the negative things - I guess I'm trying to put myself off! I use every scrap of info I have to come to a decision - and so should you." Between 2002 and 2005, Burns wrote a column for the Sunday Times, 'My DIY Pension', and apparently doubled the money from £40,000 to £80,000 over this period. By mid-2011 he had turned this into £250,000. more »

Growth Investing
5 Year Return: 14.5%
James O'Shaugnessy's Cornerstone Value

James O'Shaughnessy Cornerstone Value is a value investing strategy presented by US fund manager James O'Shaughnessy in his 1996 book, What Works on Wall Street. His extensive backtesting found that value investing works particularly well with large capitalisation stocks with above average sales and cashflow, high levels of share liquidity, which were then sorted for the highest dividend yield. O'Shaughnessy said: "Generally speaking, when things are going against you, as they inevitably will, you have to stick to the underlying strategy? Only by doing so will you be around for when it comes rebounding back." He found that this value strategy produced an annual compound return of 15% between 1954 and 1996, compared to 8.3% for the S&P 500 index. O'Shaughnessy has continued to conduct detailed analysis of Standard & Poor's Compustat database to identify the most effective investing strategies. more »

Value Investing
5 Year Return: 14.4%
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
5 Year Return: 6.1%
Winning Growth & Income

Winning Growth & Income is a dividend investing strategy inspired by an approach used by American investment analyst Kevin Matras in his book, Finding #1 Stocks. It combines growth and dividend factors by sorting the market for high yielding companies with strong growth characteristics. Apart from a high yield, this strategy looks for companies with an above average return on equity, a below average price-to-earnings ratio and where analysts have been upgrading their earnings forecasts. It also looks for companies with a low beta (the sensitivity of a share price to the movement of the market). Kevin Matras says the screen works for investors that are "looking for good companies with solid revenues that pay a good dividend". In some respects, this strategy is a small cap version of the Large Cap Dividend Attraction strategy. In Matra's original strategy criteria he uses Zacks Rank, which is a metric for analysing analyst forecasts. more »

Income Investing
5 Year Return: 4.6%
Richard Driehaus Screen

Richard Driehaus Momentum is a momentum investing strategy inspired by an approach used by US investor Richard Driehaus. It combines a focus on price and earnings momentum in small and mid-cap companies with strong, sustained earnings growth. Importantly, Driehaus wanted to find companies that had produced significant earnings surprises over the previous year by beating analyst forecasts. Driehaus said: "I would much rather invest in a stock that's increasing in price and take the risk that it may begin to decline than invest in a stock that's already in a decline and try to guess when it will turn around." Driehaus's fund management firm Driehaus Capital Management was reported to have delivered compound annual returns of 30% during the 12 years after it was started in 1980. Driehaus was named in Barron's "All-Century" team of the 25 most influential and powerful mutual fund managers in 2000. more »

Momentum Investing
5 Year Return: 2.6%
Beneish M-Score Screen

The Beneish M-Score is a checklist for identifying stocks that might be manipulating their earning figures. It was created by US finance Professor Messod Daniel Beneish and presented in a paper called The Predictable Cost of Earnings Manipulation. The M-Score is a red flag indicator that is often used as part of a short selling strategy. It calculates and distils eight different accounting variables into a single score. Generally, a score greater than -1.78 (i.e. a less negative or positive number) indicates an increased likelihood of a firm being an earnings manipulator. Beneish wrote: "We show that firms with a high probability of overstated earnings have lower future earnings, less persistent income-increasing accruals, and lower future returns." The M-score strategy apparently generated a hedged return of nearly 14% per year, mostly from the short positions. more »

Short Selling
5 Year Return: -0.8%
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