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2009 Mid-Year Stock Screen Review: Is a Market Rebound in Progress?

by Wayne A. Thorp, CFA

2009 Mid Year Stock Screen Review: Is A Market Rebound In Progress? Splash image

To say that investors have been pummeled by the stock market over the last year-and-a-half or so is probably putting it a bit lightly. After seeing the broad market indexes fall in excess of 30% or more last year, many investors were casting an apprehensive eye toward 2009.

Thus far, however, it appears that the market is finding its footing, if not staging an actual reversal. But some market watchers still warn that we are merely in the midst of the “bear trap” rebound.

Only time will tell whether we are experiencing a true turnaround, or if the market is merely taking a breather before resuming its downward march. Through the end of May of this year, the S&P 500 is up 1.8%.

However, what is more interesting is that a hypothetical portfolio of exchange-listed stocks rebalanced monthly is up over 27% for the year. As a result, many of the AAII stock screens have thus far turned in performances that dwarf the market indexes.

So far, 42 of the 59 screens tracked at AAII.com are up for the year. Of the remaining 17, two are unchanged year-to-date, and the rest are down for the year.

Mid-cap issues are outpacing the field by a wide margin this year. Furthermore, in terms of style bias, growth strategies are outperforming value strategies for the year.

Stock Screen Results

Table 1 summarizes the performance and variability of AAII’s stock screens since 1998, as well as yearly performance for the last 10 years. All of these screens were developed and tracked using AAII’s fundamental stock screening and research database program, Stock Investor Pro.

AAII tests and tracks a wide range of screening methodologies, and has backtested performance results of hypothetical portfolios invested in these individual strategies back to the start of 1998. [The box on page 29 explains the methodology we use to calculate the hypothetical performance of each screen. For more information on these screens, visit the AAII Stock Screens area of AAII.com.]

Value Strategies Price Gain (%) Monthly
Variability
 
YTD* 2008 2007 2006 2005 2004 2003 2002 2001 2000 Total
1998
Thru
2009*
Monthly
Holdings
Std.
Dev.
Gain Loss Avg. Turn-
over %
No.
Fundamental Rule of Thumb 40.9 -41.5 4.1 31.0 5.0 49.6 83.3 4.7 42.3 28.7 528.0 8.3 33.8 -19.2 50 21.8
Price-to-Free-Cash-Flow 37.5 -41.5 -21.2 26.6 10.6 30.9 61.7 13.6 63.8 17.8 364.9 8.3 51.2 -31.7 30 23.4
Dreman With Est Revisions 32.1 -37.1 4.3 39.8 9.3 35.0 69.2 16.6 -29.9 38.7 305.1 6.5 15.2 -26.2 12 82.1
Schloss 30.8 -23.1 -8.1 30.1 20.0 -26.6 140.7 -0.1 20.5 14.9 397.4 8.7 27.1 -40.4 13 52.9
Graham—Enterprising Investor 22.2 -40.7 28.1 72.3 21.3 18.9 25.9 43.5 55.3 24.2 607.9 8.8 33.1 -23.4 4 39.4
Graham—Defensive (Non-Utility) 21.6 -32.0 20.6 26.6 26.2 11.7 32.7 3.1 61.5 12.0 399.5 6.7 25.8 -17.3 19 21.0
Cash Rich Firms 19.8 -38.0 7.7 17.2 -2.5 18.6 64.0 -9.4 20.1 40.5 258.6 6.6 17.6 -20.7 32 24.7
Neff 17.3 -33.6 -13.9 13.9 7.7 29.5 85.1 15.0 65.2 37.3 559.9 7.9 32.6 -21.7 22 34.1
Lakonishok 16.5 -23.7 15.1 14.4 14.0 31.2 39.9 -5.2 -3.5 36.7 277.6 5.6 16.6 -17.9 28 90.1
P/E Relative 15.8 -15.8 3.9 21.2 17.2 24.7 51.1 11.1 16.1 20.3 400.4 5.2 14.9 -18.3 33 77.5
Dreman 13.8 -34.9 -17.5 19.3 18.7 24.2 37.7 8.3 26.4 38.0 167.3 5.9 23.9 -22.2 21 33.0
Dividend Screen—Non-DRPs 11.3 -31.7 -7.6 17.1 7.1 22.8 40.5 28.6 54.7 16.5 241.5 4.6 17.6 -15.3 30 29.7
Dividend Screen—DRPs 7.8 -24.2 -21.2 20.9 -1.5 17.4 28.3 -1.2 38.9 27.7 92.0 5.6 20.5 -18.2 30 26.5
O’Shaughnessy—Value 6.0 -49.1 -4.2 24.4 2.2 20.2 47.2 -12.1 10.6 22.3 42.5 6.5 22.0 -23.8 50 18.6
Weiss Blue Chip Div Yield 4.4 -26.2 4.5 14.2 6.4 13.6 48.9 -14.1 25.6 18.8 127.8 5.9 14.3 -16.8 13 25.6
Dividend (High Relative Yield) -1.4 -21.4 -9.6 14.5 -1.0 19.1 27.9 0.4 24.1 23.3 93.4 4.6 12.5 -14.2 41 20.3
Piotroski -1.6 32.6 -1.3 -15.8 -8.5 82.2 154.6 -15.9 100.2 -0.9 1050.9 8.2 34.3 -17.2 5 34.1
Dogs of the Dow -12.3 -45.4 -1.8 26.8 -9.8 -1.3 20.4 -9.8 -1.2 4.1 -31.3 6.2 17.1 -23.4 10 7.1
Dogs of the Dow—Low Priced 5 -21.3 -58.7 -2.7 34.9 -11.8 6.1 17.6 -6.5 7.2 3.2 -40.7 8.2 27.6 -34.8 5 15.9
 
Growth & Value Strategies Price Gain (%) Monthly
Variability
 
YTD* 2008 2007 2006 2005 2004 2003 2002 2001 2000 Total
1998
Thru
2009*
Monthly
Holdings
Std.
Dev.
Gain Loss Avg.
No.
Turn-
over %
Fisher (Philip) 67.1 -43.1 8.2 -1.2 -11.7 -3.9 78.1 -10.7 70.7 -16.7 111.2 10.5 32.8 -27.9 24 32.7
MAGNET Simple 47.1 -70.2 -17.0 72.1 58.1 38.1 62.1 -6.7 -21.7 -26.7 296.9 13.6 52.1 -30.0 3 67.2
Rule #1 Investing 42.8 -43.2 -11.7 2.5 -6.7 13.5 48.0 -29.4 38.0 15.0 96.6 8.4 27.0 -26.8 15 26.3
Foolish Small Cap 8 Revised 32.9 -60.6 13.5 44.6 15.3 -3.9 67.8 22.2 29.5 51.5 488.4 9.4 28.1 -24.2 7 30.8
Templeton 32.8 -36.6 4.6 5.3 4.7 22.2 46.8 -32.6 22.0 20.3 116.3 6.1 14.5 -23.1 25 27.8
O’Shaughnessy—Tiny Titans 27.1 -56.4 2.2 35.2 7.5 45.8 154.8 51.9 84.1 -6.6 1598.0 9.2 37.4 -21.0 25 42.1
T. Rowe Price 25.3 -47.8 -7.1 -11.3 23.1 44.9 39.2 -15.1 8.4 35.2 61.9 7.5 28.2 -20.0 11 31.3
Buffettology—Sustainable Grth 20.9 -28.9 3.9 8.7 9.5 17.5 37.6 -11.9 29.7 3.3 149.5 6.2 16.5 -20.4 33 13.6
Lynch 20.8 -37.3 11.7 15.6 7.8 59.8 59.0 -7.2 39.3 3.2 294.6 5.7 18.9 -21.3 25 22.7
Buffettology—EPS Growth 18.2 -36.9 5.8 8.8 11.9 13.2 32.8 -10.9 25.7 5.9 110.0 6.0 15.1 -20.8 46 11.8
Muhlenkamp 12.5 -24.5 -20.8 2.0 23.6 31.0 41.2 5.9 43.5 22.2 206.7 6.0 21.0 -17.6 21 23.9
Price-to-Sales 10.9 -38.5 2.4 16.6 16.9 11.1 69.8 1.3 43.3 23.3 340.5 6.4 18.3 -20.6 50 39.7
Buffett—Hagstrom 6.9 -25.8 14.4 11.3 11.4 27.6 35.2 -8.7 13.9 11.4 277.0 5.4 13.2 -19.0 30 21.7
O’Shaughnessy—All Cap 6.4 -40.9 12.5 24.1 21.9 47.4 28.7 -11.8 63.7 6.3 212.1 6.0 15.2 -21.5 25 34.6
Wanger (Revised) 4.1 -36.3 15.9 16.5 14.5 22.5 53.2 -13.1 21.1 -2.8 98.6 6.9 22.8 -19.8 32 27.8
Value on the Move—PEG W/Est Grth -1.6 -37.2 29.5 18.3 23.1 54.1 87.0 7.9 34.8 22.9 580.8 6.3 15.7 -23.1 47 43.9
O’Shaughnessy—Grth Mrkt Leaders -2.3 -44.5 15.5 9.6 18.9 6.7 26.2 -8.9 5.7 -9.0 52.0 5.6 13.6 -18.6 10 41.9
Value on the Move—PEG W/Hist Grth -2.7 -38.3 20.7 9.1 17.2 32.5 50.1 12.1 22.4 19.4 261.3 5.1 12.7 -19.1 96 36.4
Stock Market Winners -3.1 -34.7 13.0 -5.5 25.9 9.6 131.5 32.1 41.6 27.6 451.2 7.2 22.0 -23.4 13 61.8
Oberweis Octagon -5.7 -56.8 29.1 24.0 4.1 42.3 67.8 -17.5 20.2 18.4 193.7 8.9 23.3 -23.2 18 42.0
O’Shaughnessy—Growth -6.0 -38.2 12.6 17.2 14.4 45.1 90.3 10.1 19.2 11.5 405.3 7.0 18.6 -17.9 50 37.7
O’Shaughnessy—Sm Cap Grth & Val -13.0 -32.4 29.6 36.2 19.1 26.8 107.5 0.8 13.4 13.2 580.8 7.1 18.5 -18.2 25 47.9
MAGNET Complex -13.2 -33.7 40.2 -28.6 26.2 18.6 9.1 4.1 110.6 3.1 899.7 14.0 63.0 -27.3 2 66.8
Zweig -16.7 -33.9 20.7 18.6 27.8 49.5 88.8 16.9 57.9 46.2 1287.3 8.8 32.7 -24.2 14 42.6
 

Table 1 also provides index performance data over the same period for comparison. The screening strategies listed in the table are grouped by style—value, growth & value, and growth—with additional specialty and sector screens broken out separately. Within each group in Table 1, we rank the strategies in descending order by year-to-date performance as of May 31, 2009.

Growth Strategies Price Gain (%) Monthly
Variability
 
YTD* 2008 2007 2006 2005 2004 2003 2002 2001 2000 Total
1998
Thru
2009*
Monthly
Holdings
Std.
Dev.
Gain Loss Avg. Turn-
No. over %
Driehaus 19 -42.7 28.9 41.4 4.3 -10.8 87.8 -42.6 -27.4 -8.3 72.2 10.6 51.3 -25.7 14 64.3
IBD Stable 70 14.7 -37.2 -10.6 6.9 1.8 29 48.4 -11 9.5 23.9 104.4 5.7 18.4 -21.9 50 12.1
Return on Equity 5.3 -33.8 7.2 8.7 17.6 23.9 46.9 -3.8 18.1 31.4 211.3 6 13 -22.2 35 20.5
Inve$tWare Quality Growth 3 -24.1 -10.9 0.9 14.9 18 33.3 -25 8 18.5 35.7 5.9 18.2 -22 25 12.1
O’Neil’s CAN SLIM 0 -10.5 30.4 29.5 24.1 -3.8 79 20.5 54.4 38 1,351.30 6.8 23.6 -23.1 8 57.1
O’Neil’s CAN SLIM Revised 3rd Ed 0 -26.3 31.4 -5.4 -1 -2.6 74.7 -10.3 33.4 96.3 521.8 8.6 52.7 -26.7 10 64.2
Foolish Small Cap 8 -4.3 -53.5 -2.8 9.4 22.6 10.1 107.7 -19.4 -8.6 24.2 158.7 9.7 38.8 -22.5 21 36.3
 
Sector/ Specialty Strategies Price Gain (%) Monthly
Variability
 
YTD* 2008 2007 2006 2005 2004 2003 2002 2001 2000 Total
1998
Thru
2009*
Monthly
Holdings
Std.
Dev.
Gain Loss Avg. Turn-
No. over %
Est Rev Up 5% 37.8 -18.4 25.7 40.3 24.5 25.8 75.0 12.9 -8.1 3.6 1632.7 8.7 30.8 -21.7 42 91.9
Dual Cash Flow 35.1 -46.8 -7.3 20.4 10.4 24.7 66.9 -13.9 24.6 5.7 352.2 7.6 34.7 -23.6 65 31.3
Est Rev Down 5% 29.7 -47.8 -24.7 26.1 2.5 8.0 70.9 -61.5 28.3 -4.2 -29.3 9.6 33.5 -30.5 82 88.4
ADRs 22.9 -58.7 25.3 44.7 12.9 14.5 82.3 -4.4 -5.3 9.9 129.8 7.2 31.1 -29.7 26 42.7
Est Rev Down 21.5 -42.6 -20.0 12.9 -0.4 13.4 51.8 -43.8 26.7 -7.1 -25.9 7.8 25.0 -25.3 217 78.5
Insider Net Purchases 21.5 -51.7 -10.9 4.8 -14.6 33.5 86.8 -20.9 21.8 -38.3 -25.5 8.9 27.8 -27.2 28 28.6
Est Rev Up 17.1 -31.2 13.7 21.8 17.3 25.2 57.3 0.8 -3.5 2.2 359.9 6.1 12.2 -18.6 165 81.1
Murphy Technology 14.8 -49.7 -15.8 -1.9 34.1 107.9 -33.7 -79.6 26.7 -52.1 -66.2 14.3 58.5 -44.9 11 23.2
Graham—Defensive (Utility) -8.2 -18.4 1.8 29.4 18.5 16.2 16.6 -15.9 5.2 51.4 122.5 4.5 12.0 -13.4 17 15.2
 
Indexes Price Gain (%)          
YTD* 2008 2007 2006 2005 2004 2003 2002 2001 2000 Total
1998
Thru
2009*
Monthly
Variability
   
   
Std.
Dev.
Gain  
Loss
   
   
All Exchange-Listed Stocks 27.1 -46.3 -4.5 17.2 4.5 22.8 81.1 -13.3 21.2 -14.2 129.0 6.8 23.9 -22.1    
Dow Jones 30 -3.1 -33.8 6.4 16.3 -0.1 2.6 25.3 -16.8 -7.1 -6.2 7.5 4.7 11.8 -15.1    
NASDAQ 100 18.5 -41.9 18.7 6.8 1.5 10.4 49.1 -37.6 -32.7 -36.8 45.0 9.4 25.0 -27.5    
S&P 500 1.8 -38.5 3.5 13.6 3.0 9.0 26.4 -23.4 -13.0 -10.1 -5.3 4.8 9.7 -16.8    
S&P 500 Growth (w/divs) 6.6 -33.9 9.1 11.0 1.1 7.0 27.1 -28.1 -16.1 -19.1 8.7 5.4 10.8 -16.5    
S&P 500 Value (w/divs) -0.9 -38.5 2.0 15.3 8.7 15.0 30.4 -16.6 -8.2 -0.5 11.0 4.7 11.0 -17.1    
S&P MidCap 400 6.9 -37.3 6.7 9.0 11.3 15.2 34.0 -15.4 -1.6 16.2 72.6 5.7 14.8 -21.8    
S&P MidCap 400 Growth (w/divs) 12.3 -36.9 13.5 5.8 14.4 15.8 37.6 -19.7 -2.6 15.8 162.6 6.4 19.0 -22.2    
S&P MidCap 400 Value (w/divs) 3.7 -33.4 2.7 13.4 10.8 17.2 33.8 -9.4 1.4 19.5 54.7 5.2 15.7 -21.8    
S&P SmallCap 600 -1.4 -32.0 -1.2 14.1 6.7 21.4 37.8 -15.3 5.7 11.0 46.2 6.1 17.3 -20.2    
S&P SmallCap 600 Grth (w/divs) 1.8 -32.2 5.6 10.6 7.3 24.3 38.5 -16.6 3.0 7.6 64.4 6.4 17.0 -21.7    
S&P SmallCap 600 Val (w/divs) -3.2 -28.9 -5.5 19.6 8.5 21.1 39.2 -12.9 9.5 15.8 60.4 5.7 18.4 -19.6    
 

Table 2 provides overall top rankings in terms of three performance measures: the first table provides the top 10 AAII screens ranked by 2009 year-to-date performance; the second table shows the top 10 AAII screens ranked by long-term (since inception) performance; and the third table provides the top 10 AAII screens ranked by risk-adjusted performance. [The risk-adjusted performance figures provide an indication of the average monthly price gains of the screen in excess of the overall market relative to the screen’s risk, as measured by its monthly price variability (standard deviation).]

The Top 10 Ranked by 2009 Mid-Year Performance  
Rank Screen Type of Strategy 2009
YTD
Price Gain*
(%)
 
 
 
 
1 Fisher (Philip) Growth & Value 67.1  
2 MAGNET Simple Growth & Value  47.1  
3 Rule #1 Investing Growth & Value 42.8  
4 Fundamental Rule of Thumb Value 40.9  
5 Est Rev Up 5% Sector/Specialty 37.8  
6 Price-to-Free-Cash-Flow Value 37.5  
7 Dual Cash Flow Sector/Specialty 35.1  
8 Foolish Small Cap 8 Revised Growth & Value 32.9  
9 Templeton Growth & Value 32.8  
10 Dreman With Est Revisions Value 32.1  
 
 
The Top 10 Ranked by Long-Term Performance*  
Rank Screen Type of Strategy Total
Gain*
(%)
 
 
 
1 Est Rev Up 5% Sector/Specialty 1632.7  
2 O’Shaughnessy—Tiny Titans Growth & Value 1598.0  
3 O’Neil’s CAN SLIM Growth 1351.3  
4 Zweig Growth & Value 1287.3  
5 Piotroski Value 1050.9  
6 MAGNET Complex Growth & Value 899.7  
7 Graham—Enterprising Investor Value 607.9  
8 O’Shaughnessy—Small Cap Gr & Val Growth & Value 580.8  
9 Value on the Move—PEG w/Est Gr Growth & Value 580.8  
10 Neff Value 559.9  
 
 
The Top 10 Ranked by Risk-Adjusted Performance*
Rank Screen Type of Strategy Monthly
Variability
(Std Dev)
(%)
 
Risk-Adj
Performance*
(%)
1 O’Neil’s CAN SLIM Growth 6.8 28.2
2 Est Rev Up 5% Sector/Specialty 8.7 25.2
3 O’Shaughnessy—Tiny Titans Growth & Value 9.2 24.1
4 Zweig Growth & Value 8.8 23.1
5 Piotroski Value 8.2 22.5
6 Value on the Move—
PEG w/Est Gr 
Growth & Value 6.3 21.1
 
7 P/E Relative Value 5.2 20.0
8 O’Shaughnessy—
Small Cap Gr & Val 
Growth & Value 7.1 19.5
 
9 Neff Value 7.9 18.8
10 Graham—Enterprising
Investor
Value 8.8 17.5
 
 

Mid-Year Leaders

For the second year in a row, the growth and value strategy of Philip Fisher leads all AAII stock screens at the midpoint, with a 67.1% gain through the end of May.

The Philip Fisher screen identifies non-dividend-paying stocks with a history of net margins (net income divided by sales) exceeding industry norms, growing sales, and reasonable price-earnings valuations relative to estimated long-term earnings growth.

The Philip Fisher strategy has had mixed results since 1998, and a turbulent last 12 months. The screen was also the top performer in last year’s mid-year review. However, once the dust settled at the end of 2008, the Philip Fisher approach had lost 43.1% and dropped near the bottom of the pack. Since the beginning of 1998, the Philip Fisher screen has a cumulative gain of 111.2%. The S&P 500, in comparison, is down a total of 5.3% cumulatively since 1998. Among the industries currently dominating the Philip Fisher screen are biotechnology & drugs, healthcare facilities, and oil well services & equipment.

The Estimate Revisions Up 5% screen stands as the top long-term winner among our stock screens. This specialty methodology has a cumulative return of 1,632.7% since 1998.

Year-to-date, the Estimate Revisions Up 5% screen is enjoying strong performance, with a gain of 37.8% through the end of May. In fact, this is also the highest performance among all the sector/specialty screens AAII follows.

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The screen isolates companies where analysts have increased their earnings estimate for the current fiscal year and next fiscal year by at least 5% over the last month. Furthermore, there can be no downward earnings revisions for the current fiscal year estimate and next year’s estimate over the last month. Only the 30 companies with the greatest percentage increase in their current fiscal-year consensus estimate over the last month are tracked for performance purposes. Currently, retail firms dominate the passing company listing.

Value Winners

Compared to growth-oriented market indexes, value has been underperforming in 2009. However, the value screens tracked by AAII, for the most part, have been enjoying a relatively successful year, thus far, as 15 of the 19 approaches in the value category have positive year-to-date returns through the end of May.

The Fundamental Rule of Thumb screen leads the value group for the year with a gain of 40.9%. This screen seeks firms with a combination of low price-earnings ratio (price divided by earnings per share), high dividend yield (dividends per share divided by price), high earnings retention level (percentage of earnings not paid out through dividends), and high return on equity (net income divided by owner’s equity).

Joseph Piotroski’s low price-to-book value strategy is the long-term value winner with a cumulative return of 1,050.9% since the start of 1998. This screen was also the only screen tracked at AAII.com that ended 2008 with a gain (it was up 32.6% for the year). The screen was so successful in 2008 because no companies passed the screen the last five months of the year, so the strategy was “out of the market” during the height of the 2008 market downturn.

Piotroski, an accounting professor at the University of Chicago, developed a nine-point scale that helps to identify stocks with solid and improving financials. Profitability, financial leverage, liquidity, and operating efficiency are examined using popular ratios and basic financial elements that are easy to use and interpret. For AAII’s Piotroski screen, a passing stock is required to have a perfect score of nine as well as rank in the bottom 20% of all stocks based on price-to-book-value ratio.

In terms of year-to-date performance, however, the Piotroski screen is at the bottom of the pack—the screen again had no passing companies at the end of April or May. Historically, on average only five companies pass the screen each month, making it difficult to employ if you want to build a portfolio.

Growth Winners

At the mid-way point for 2009, the Richard Driehaus screen is the leader among growth-oriented strategies. This momentum-based approach has gained 19.0% year-to-date while focusing on small- and mid-cap companies with increasing earnings growth momentum over each of the last three years, positive price movement, and a recent positive earnings surprise of at least 10%.

Since it is looking for rapidly growing companies, it is probably not surprising that the set of companies currently passing the screen is weighted toward technology and biotech firms.

The long-term winner in the growth category is the “original” CAN SLIM approach, with a cumulative gain of 1,351.3% since the start of 1998. The approach combines price-oriented factors to isolate companies with strong price and earnings momentum, and tends to identify small-cap growth. However, with its restrictive price momentum filters, the screen has yet to have any companies pass in 2009. Therefore, the screen is even for the year, and toward the bottom of the growth screens pack in terms of relative performance.

Risk and Turnover

When measuring the performance of any individual investment or investment approach, it is important to consider the risk of the asset or strategy and whether it fits into your own risk profile. Just because an approach posts strong annual gains does not necessarily mean that it is right for you. Your own risk tolerance should also play a role in deciding which types of stocks to add to your portfolio.

Table 1 includes Monthly Variability columns, which report the greatest monthly percentage gain or loss as an indication of volatility that occurred over the last 11+ years.

The Monthly Variability columns also report the monthly standard deviation over the full study period. Standard deviation is a measure of total risk, expressed as a monthly change, which indicates the degree of variation for a strategy over the test period. The higher the standard deviation, the greater the total risk of the strategy. Ideally, higher returns compensate you for taking on higher levels of risk.

The Murphy Technology growth screen once again has the highest monthly standard deviation of the methodologies AAII tracks, at 14.3%. However, it is also the worst-performing screen we track, with a cumulative loss of 66.2% since the start of 1998.

In contrast, two other screens that are among the highest in terms of monthly standard deviations also rank in the top 10 in terms of overall performance: O’Shaughnessy—Tiny Titans and MAGNET Complex.

The top 10 risk-adjusted performance table in Table 2 adjusts the average monthly performance gain of each screen relative to the amount of risk undertaken by the approach. The risk-adjusted performance figure reported measures the screen’s average monthly performance in excess of the S&P 500’s average monthly price gain, and divides the result by the screen’s risk (as measured by the monthly standard deviation). The result is a gains-per-unit-of-risk figure, putting the screens on an equal risk footing. Under this performance ranking system, stock screens with higher total gains but also high levels of risk may rank below some screens with somewhat lower long-term gains but much lower levels of risk.

The Monthly Holdings columns in Table 1 provide data on portfolio holdings over time—the total average number of stocks that were in each portfolio on a monthly basis over the last 11½ years, and the average percentage turnover from month-to-month.

While the backtesting methodology we use to calculate the hypothetical performance of these screens does not factor in turnover, a high-turnover portfolio will incur greater trading costs than a low-turnover portfolio (all else being equal). This, in turn, will have an adverse affect on the portfolio’s overall performance.

The Estimate Revisions Up 5% screen has the highest monthly turnover, at 91.9%. This means that, on average, only 8.1% of the same stocks pass the screen from one month to the next. Coincidentally, this screen is also the top-performing long-term screen overall tracked on AAII.com, with a cumulative gain of 1,632.7% since the start of 1998; its monthly standard deviation of 8.7% puts it in the middle of the pack in terms of relative risk.

Conclusion

The first step of stock screening is to establish a set of practical rules to identify a collection of potential investment opportunities. The next step is to construct and monitor a portfolio after carefully analyzing the prospective investments. Following these rules instead of allowing your emotions to dictate your buy and sell decisions should help improve your long-term performance.

The AAII Stock Screen strategies are interpretations of the investment approaches advocated by prominent investment professionals or are based on basic investment principles backed by academic research and real-world results. Examining the characteristics of an investment methodology reveals many of the practical problems you may run into when trying to develop your own disciplined approach to investing.

One strategy we do not suggest is to simply select the methodology with the highest return and blindly buy the stocks that pass the screen each month. Instead, it is important to gain an understanding of the forces that influence the portfolio’s performance and how these strategies might perform during current and expected future economic and market environments.

Most importantly, however, remember that screening is only a first step. Due diligence is needed to evaluate a stock to decide if it has the necessary financial strength and the risk and time horizon qualities required for your portfolio.

For further information on these approaches, consult the AAII Stock Screens area of AAII.com.

How We Evaluate the Screens

The AAII screens are an educational resource for our members, designed to expose you to a wide range of stock investment approaches, as well as the individual companies that pass each investment screen month-to-month. We report the performance of hypothetical portfolios of the stocks passing the individual screens for comparison to illustrate how various stock selection strategies perform over differing market conditions. We do not intend this to be an enticement to invest based on any one methodology nor is this an endorsement of any specific investment approach.

Each month, over 50 separate screens are performed using AAII’s Stock Investor Pro software. Strategies run the gamut from “pure” value- and growth-based approaches, small-cap to large-cap, to some specialty methodologies, and many that fall in between.

How We Calculate Returns

The performances of the stocks held in hypothetical portfolios for each screen are tracked on a monthly basis. At the end of each month, we run each screen and the companies passing each screen are “purchased” in equal dollar amounts using the month-end price. We assume that we hold these stocks for one month, “selling” all the stocks at next month’s closing price. The performance of the portfolio for that month is the average percentage change from month-end close to month-end close. These monthly performance figures are used to generate the cumulative gain for a screen. We then run the screen with the new month-end data and repeat the process all over again, investing all proceeds. Sell rules are the same as buy rules. Thus, a stock is “sold” (no longer included in the portfolio) if it ceases to meet the initial criteria, and new stocks are added if they qualify. Stocks that no longer qualify are dropped even if the strategist behind a particular approach suggests different sell rules versus buy rules.

Keep in mind that the impact of factors such as commissions, bid-ask spreads, and time slippage (time between the initial decision to buy a stock and the actual purchase) are not considered. This overstates the reported performance, but all approaches are subject to the same conditions and procedures. Higher turnover portfolios would typically benefit more from these simplified rules.

The only time a given approach is “in cash” (not invested in any stocks) is when no companies pass the screen in a given month.

Wayne A. Thorp, CFA is a vice president and senior financial analyst at AAII and editor of Computerized Investing. Follow him on Twitter at @WayneTAAII.


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