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2009 Year-End Screening Review: The Bulls Stage a Rally

by Wayne A. Thorp, CFA

2009 Year End Screening Review: The Bulls Stage A Rally Splash image

What a difference a year can make. After the S&P 500 posted its third-worst decline in 2008—losing 38.5%—few investors expected the stock market to stage such a remarkable comeback in 2009. Year-to-date, the S&P 500 is up 21.3% (through the end of November). While there is no doubt many are letting out a sigh of relief, it is sobering to realize that, despite this year’s impressive gains, we are still approximately 40% off the market highs of October 2007. Adding to the trepidation is the potential for a “double-dip” recession.

Looking at the 60 stock screens AAII tracks at AAII.com we see that, in general, they too have enjoyed a rebound. Through the end of November, only five of the 60 were down for the year, while the typical screen was up 40% for the year. This makes 2009 the second-best year for our stock screens, trailing only the 55.3% median gain in 2003. Eleven of the screens are experiencing their best years ever.

Ranking 2009 Performance

Table 1 summarizes the performance and volatility of the stock screens that are tracked at AAII.com and built into AAII’s fundamental stock screening and research database program, Stock Investor Pro.

Table 1 presents the price change performance for the various screening methodologies, which are broken down into style groups: value, growth & value, and growth. In addition, specialty and sector approaches are broken out separately. The screening strategies are ranked in descending order within their grouping by their year-to-date price performance as of November 30, 2009. The bottom of the table presents performance data for major stock indexes.

The Top Performer for 2009

A newcomer to our collection of stock screens walked away with the title of Top-Performing Screen for 2009: the reasonably priced sales growth and price momentum MAGNET Simple screen of Jordan Kimmel. The screen has gained an astonishing 339.5% through the end of November.

Kimmel’s MAGNET system of investing attempts to identify stocks that will be attractive to growth, momentum, and value investors alike. The growth aspect of the MAGNET Simple screen looks for companies that have increased sales by at least 15% over the trailing 12 months (last four fiscal quarters).

For momentum investors, the MAGNET Simple screen looks for high price momentum over the last three months and 12 months. Specifically, companies must rank in the top 10% of the stock universe based on relative price strength over the last 13 and 52 weeks.

Lastly, Kimmel uses the price-earnings-to-earnings-growth ratio, or PEG, to find undervalued stocks. In order to pass the AAII MAGNET Simple screen, a company’s current valuation (price-earnings ratio) cannot be more than 50% of its estimated annualized growth rate in earnings for the next three to five years.

Value Strategies Price Gain (%) Price Gain (%) Monthly
Variability (%)
Historical Monthly
Risk & Return
Trailing 3 Yr Monthly
Risk & Return
   
Monthly
Ann’l
Avg*
Cumulative Ret
(%)
Std Dev
(%)
Sharpe
(X)
Ret
(%)
Std Dev
(%)
Sharpe
(X)
Holdings
2009* 2008.0 2007.0 3 Yr Hist* Gain Loss Avg # Turnover %
Price-to-Free-Cash-Flow 129.6 -41.5 -21.2 18.8 11.5 676.2 51.2 -31.7 1.8 8.5 17.9 1.1 13.6 6.8 30.0 23.1
Fundamental Rule of Thumb 79.8 -41.5 4.1 19.1 16.5 701.4 33.8 -19.2 1.8 8.1 18.7 0.9 9.2 7.5 50.0 21.7
Piotroski 67.8 32.6 -1.3 28.4 119.6 1861.6 38.2 -17.2 2.5 8.9 24.9 2.2 9.9 20.5 5.0 35.0
Dreman With Est Revisions 53.2 -37.1 4.3 13.9 1.2 369.7 15.2 -26.2 1.3 6.4 16.2 0.3 6.6 2.2 13.0 82.3
Schloss 51.9 -23.1 -8.1 15.9 10.1 477.7 27.1 -40.4 1.6 8.7 15.6 0.5 7.6 4.6 13.0 54.5
Graham—Defensive Investor (Non-Util) 50.4 -32.0 20.6 16.5 25.6 517.7 25.8 -17.3 1.5 6.6 18.6 1.0 8.3 9.7 20.0 20.8
Graham—Enterprising Investor 49.7 -40.7 28.1 19.9 23.4 767.0 33.1 -23.4 1.9 8.6 18.8 1.2 10.4 9.8 4.0 38.9
Cash Rich Firms 49.5 -38.0 7.7 13.4 1.4 347.8 17.6 -20.7 1.3 6.6 15.3 0.2 6.4 -0.4 32.0 24.8
Lakonishok 46.9 -23.7 15.1 14.0 30.4 375.9 16.6 -17.9 1.3 5.7 17.5 0.9 6.2 11.5 28.0 90.1
P/E Relative 41.1 -15.8 3.9 16.4 22.0 510.2 14.9 -18.3 1.4 5.1 22.2 0.7 6.5 7.7 33.0 77.2
Neff 38.9 -33.6 -13.9 18.8 -12.7 682.0 32.6 -21.7 1.8 7.8 19.8 0.2 9.9 0.2 22.0 34.2
Dreman 29.2 -34.9 -17.5 9.8 -30.9 203.5 23.9 -22.2 1.0 5.8 11.8 -0.7 8.3 -10.3 20.0 32.8
O'Shaughnessy—Value 29.1 -49.1 -4.2 4.7 -34.8 73.6 22.0 -23.8 0.6 6.4 5.2 -0.8 8.8 -11.4 50.0 18.5
Weiss Blue Chip Div Yield 26.7 -26.2 4.5 8.9 -2.8 176.3 14.3 -16.8 0.9 5.8 10.6 0.0 5.7 -4.1 13.0 25.5
Dividend Screen—DRPs 24.0 -24.2 -21.2 6.9 -24.8 120.8 20.5 -18.2 0.7 5.5 8.0 -0.4 7.8 -8.1 30.0 26.4
Dividend Screen—Non-DRPs 23.3 -31.7 -7.6 11.8 -21.0 278.2 17.6 -15.3 1.0 4.5 17.0 -0.4 6.2 -8.8 30.0 29.3
Dividend (High Relative Yield) 12.6 -21.4 -9.6 6.9 -19.4 121.0 12.5 -14.2 0.7 4.6 8.7 -0.4 5.3 -11.9 42.0 20.1
Dogs of the Dow 6.3 -45.4 -1.8 -1.5 -40.9 -16.7 17.1 -23.4 0.1 6.2 -3.2 -1.3 8.2 -18.1 10.0 7.1
Dogs of the Dow—Low Priced 5 -10.8 -58.7 -2.7 -3.3 -63.0 -32.8 27.6 -34.8 0.1 8.1 -2.5 -2.2 11.8 -20.3 5.0 15.9
                                 
Growth & Value Strategies Price Gain (%) Price Gain (%) Monthly
Variability (%)
Historical Monthly
Risk & Return
Trailing 3 Yr Monthly
Risk & Return
   
Monthly
Ann’l
Avg*
Cumulative Ret
(%)
Std Dev
(%)
Sharpe
(X)
Ret
(%)
Std Dev
(%)
Sharpe
(X)
Holdings
2009* 2008.0 2007.0 3 Yr Hist* Gain Loss Avg # Turnover %
MAGNET Simple 339.5 -70.2 -17.0 23.1 8.4 1086.0 52.1 -30.0 2.7 14.0 17.0 0.9 16.4 4.5 3.0 66.3
Foolish Small Cap 8 Revised 126.1 -60.6 13.5 21.3 6.1 900.7 28.1 -24.2 2.1 9.7 18.7 0.9 11.3 6.6 7.0 30.6
Rule #1 Investing 97.0 -43.2 -11.7 8.7 -4.9 171.2 27.0 -26.8 1.1 8.3 9.4 0.2 9.2 -0.3 15.0 26.4
Fisher (Philip) 88.6 -43.1 8.2 7.6 15.8 138.3 32.8 -27.9 1.1 10.3 8.5 1.4 11.4 10.4 23.0 32.7
Magic Formula  80.7 -36.3 -5.6 12.7 16.9 316.8 30.7 -22.4 1.3 7.8 13.3 1.1 10.0 9.0 30.0 24.7
Lynch 59.7 -37.3 11.7 14.9 19.9 421.6 18.9 -21.3 1.3 5.6 18.8 0.7 6.9 7.6 25.0 22.7
Buffettology—Sustainable Growth 54.6 -28.9 3.9 10.2 11.7 219.0 16.5 -20.4 1.0 6.2 12.0 0.6 6.8 5.9 33.0 13.4
O'Shaughnessy—Tiny Titans 54.3 -56.4 2.2 28.9 -25.3 1960.8 37.4 -21.0 2.5 9.1 25.1 -0.5 8.8 -8.0 25.0 42.4
Buffettology—EPS Growth 48.0 -36.9 5.8 8.4 -1.7 162.9 15.1 -20.8 0.9 5.9 10.0 0.2 6.8 0.6 46.0 11.6
Templeton 47.8 -36.6 4.6 7.7 -3.0 140.7 14.5 -23.1 0.8 6.0 8.9 0.1 6.7 -0.7 25.0 27.7
Price-to-Sales 35.0 -38.5 2.4 15.1 -13.4 436.2 18.3 -20.6 1.4 6.3 17.7 -0.2 7.3 -5.1 51.0 39.6
Muhlenkamp 34.3 -24.5 -20.8 11.5 -16.4 266.0 21.0 -17.6 1.1 6.0 13.8 -0.2 7.5 -4.8 21.0 23.8
T. Rowe Price 33.4 -47.8 -7.1 4.7 -37.3 72.3 28.2 -20.0 0.7 7.4 5.3 -1.0 9.6 -11.9 11.0 30.9
Buffett—Hagstrom 23.6 -25.8 14.4 13.1 4.4 335.8 13.2 -19.0 1.2 5.3 17.1 0.2 6.1 0.9 30.0 21.2
O'Shaughnessy—All Cap 17.6 -40.9 12.5 10.9 -21.4 244.8 15.2 -21.5 1.2 6.0 16.0 -0.5 6.9 -9.4 25.0 34.4
Wanger (Revised) 17.1 -36.3 15.9 7.0 -13.1 123.4 22.8 -19.8 0.8 6.8 7.8 -0.2 6.9 -5.0 31.0 27.7
Value on the Move—PEG w/Est Grth 17.1 -37.2 29.5 19.2 -3.9 710.5 15.7 -23.1 1.7 6.4 22.2 0.1 7.0 -1.9 46.0 44.0
Value on the Move—PEG w/Hist Grth 15.2 -38.3 20.7 13.0 -12.4 328.0 12.7 -19.1 1.2 5.0 17.6 -0.3 5.9 -7.9 93.0 36.9
O'Shaughnessy—Growth 12.7 -38.2 12.6 16.3 -17.3 505.7 18.6 -17.9 1.5 6.8 18.2 -0.3 6.6 -7.3 50.0 37.6
O'Shaughnessy—Grth Mrkt Leaders 6.3 -44.5 15.5 4.3 -33.0 65.3 13.6 -18.6 0.5 5.5 4.4 -1.0 6.1 -20.2 10.0 41.9
Oberweis Octagon 0.7 -56.8 29.1 10.1 -44.5 213.8 23.3 -23.2 1.2 9.0 10.5 -0.6 9.3 -7.9 17.0 41.9
Stock Market Winners -9.0 -34.7 13.0 14.8 -34.1 418.1 22.0 -23.4 1.4 7.2 16.0 -0.9 8.0 -13.8 13.0 62.3
O'Shaughnessy—Sm Cap Grth & Val -14.3 -32.4 29.6 17.3 -19.6 571.0 18.5 -18.2 1.6 7.1 18.7 -0.3 7.3 -6.4 25.0 48.0
Zweig -23.6 -33.9 20.7 23.8 -37.4 1172.7 32.7 -24.2 2.2 8.7 21.8 -0.7 9.6 -8.9 14.0 42.5
MAGNET Complex -31.1 -33.7 40.2 19.0 -39.4 694.1 63.0 -27.3 2.3 13.8 15.0 -0.2 10.1 -3.4 2.0 68.0
                                 
Growth Strategies Price Gain (%) Price Gain (%) Monthly
Variability (%)
Historical Monthly
Risk & Return
Trailing 3 Yr Monthly
Risk & Return
   
Monthly
Ann’l
Avg*
Cumulative Ret
(%)
Std Dev
(%)
Sharpe
(X)
Ret
(%)
Std Dev
(%)
Sharpe
(X)
Holdings
2009* 2008.0 2007.0 3 Yr Hist* Gain Loss Avg # Turnover %
O'Neil's CAN SLIM 97.3 -10.5 30.4 32.5 156.7 2,763.60 69.6 -23.1 2.7 8.8 27.7 3.6 13.1 26.1 8 56.5
Driehaus 96.5 -42.7 28.9 9.2 47.2 184.20 51.3 -25.7 1.4 11 10.1 1.4 9.9 12.1 14 63.8
IBD Stable 70 46 -37.2 -10.6 8.4 -14.4 160.3 18.4 -21.9 0.8 5.7 10 -0.2 7.2 -5.9 48 12.1
Return on Equity 32.1 -33.8 7.2 12.1 -7.5 290.60 13 -22.2 1.1 6 14.7 0 6.3 -3.5 35 20.4
Foolish Small Cap 8 31.3 -53.5 -2.8 11.2 -41.1 254.9 38.8 -22.5 1.4 9.8 11.1 -1.3 9.6 -15.3 21 36.2
Inve$tWare Quality Growth 31.2 -24.1 -10.9 4.7 -12.2 72.80 18.2 -22 0.6 5.9 5 -0.3 6.7 -6.8 24 11.9
O'Neil's CAN SLIM Revised 3rd Ed 16.8 -26.3 31.4 18.1 14.3 626.5 52.7 -26.7 1.7 8.5 17.2 0.6 6.6 5.7 9 64.9
                                 
Sector/Specialty Strategies Price Gain (%) Price Gain (%) Monthly
Variability (%)
Historical Monthly
Risk & Return
Trailing 3 Yr Monthly
Risk & Return
   
Monthly
Ann’l
Avg*
Cumulative Ret
(%)
Std Dev
(%)
Sharpe
(X)
Ret
(%)
Std Dev
(%)
Sharpe
(X)
Holdings
2009* 2008.0 2007.0 3 Yr Hist* Gain Loss Avg # Turnover %
Est Rev Up 5% 72.9 -18.4 25.7 29.5 79.2 2,074.50 30.8 -21.7 2.5 8.6 26.4 1.9 7.4 23.3 43 91.7
Dual Cash Flow 64.6 -46.8 -7.3 15.4 -17.4 450.70 34.7 -23.6 1.5 7.5 16.1 -0.2 8.7 -4.3 67 31
Est Rev Down 5% 62.7 -47.8 -24.7 -1 -34.8 -11.3 33.5 -30.5 0.4 9.5 1.2 -0.5 11 -5.9 81 88.6
Insider Net Purchases 53.5 -51.7 -10.9 -0.5 -33.8 -5.80 27.8 -27.2 0.3 8.8 0.9 -0.5 9.9 -7.3 28 28.6
ADRs 49.5 -58.7 25.3 9 -19.8 179.7 31.1 -29.7 1 7.2 10 -0.1 9.2 -3.2 26 42.9
Est Rev Down 46.8 -42.6 -20 -0.9 -32.3 -10.50 25 -25.3 0.2 7.7 -0.5 -0.6 9.1 -8.9 215 78.6
Est Rev Up 44.6 -31.2 13.7 15.7 14.3 467.7 12.2 -18.6 1.4 6 19 0.5 6.2 5.1 168 81
Murphy Technology 24.5 -49.7 -15.8 -8.1 -44.4 -63.3 58.5 -44.9 0.3 14.0 0.5 -0.6 8.6 -9.6 11.0 23.0
Graham--Defensive Investor 1.9 -18.4 1.8 7.9 -12.7 147.0 12.0 -13.4 0.7 4.4 10.6 -0.3 4.2 -10.7 17.0 14.8
                                 
Indexes Price Gain (%) Price Gain (%) Monthly
Variability (%)
Historical Monthly
Risk & Return
Trailing 3 Yr Monthly
Risk & Return
   
 
Ann’l
Avg*
Cumulative Ret
(%)
Std Dev
(%)
Sharpe
(X)
Ret
(%)
Std Dev
(%)
Sharpe
(X)
 
2009* 2008.0 2007.0 3 Yr Hist* Gain Loss    
Dow Jones 30 17.9 -33.8 6.4 2.3 -15.4 30.80 11.8 -15.1 0.3 4.7 0.7 -0.5 5.2 -12.7    
NASDAQ 100 45.9 -41.9 18.7 5 -1.3 78.50 25 -27.5 0.8 9.2 6.3 0.2 6.7 -0.3    
S&P 500 21.3 -38.5 3.5 1 -21.8 12.9 9.7 -16.8 0.2 4.8 -1.4 -0.6 5.6 -14.6    
S&P 500 Growth (w/divs) 28.8 -33.9 9.1 2.3 -6.7 31.30 10.8 -16.5 0.3 5.4 1.3 -0.2 5.2 -6.5    
S&P 500 Value (w/divs) 19.1 -38.5 2 2.4 -23.5 33.4 11 -17.1 0.3 4.7 1.7 -0.7 6.3 -13.5    
S&P MidCap 400 27.2 -37.3 6.7 6.2 -15.4 105.40 14.8 -21.8 0.7 5.7 7.1 -0.2 6.7 -6.5    
S&P MidCap 400 Growth (w/divs) 30.8 -36.9 13.5 7.6 -10.7 205.9 19 -22.2 1 6.3 11.7 0.1 6.7 -1.6    
S&P MidCap 400 Value (w/divs) 25.0 -33.4 2.7 9.8 -5.1 86.5 15.7 -21.8 0.6 5.2 6.1 -0.2 6.8 -6.1    
S&P SmallCap 600 14.1 -32.0 -1.2 4.5 -23.4 69.3 17.3 -20.2 0.6 6.0 4.8 -0.5 7.0 -9.6    
S&P SmallCap 600 Growth (w/divs) 19.8 -32.2 5.6 5.7 -14.6 93.5 17.0 -21.7 0.7 6.3 6.4 -0.2 7.0 -5.0    
S&P Smallcap 600 Value (w/divs) 11.6 -28.9 5.5 5.3 -24.8 84.8 18.4 -19.6 0.6 5.7 5.8 -0.5 7.1 -10.3    
All Exchange-Listed Stocks 56.7 -46.3 4.5 9.1 -18.6 182.4 23.9 -22.1 1.0 6.7 10.3 -0.3 7.7 -5.7    
   
   

The left-hand Monthly Holdings column in Table 1 provides data on portfolio holdings over time—the average number of stocks passing the screen each month since testing began in 1998. On average, only three companies have passed the MAGNET Simple screen each month since 1998. By means of comparison, the median number of passing companies for all AAII stock screens since the beginning of 1998 is 25.

While it is hard to ignore the MAGNET Simple screen’s performance over the last 11-plus years, an approach with such a small number of passing companies is nearly impossible to implement in order to create a diversified portfolio.

The Turnover % column in Table 1 gives an indication of how many stocks are dropped by a given strategy from month to month. At the end of each month, the hypothetical portfolios invested in the stocks passing these screens are rebalanced. Only those stocks passing a screen in a given month are held. The lower the percentage turnover, the greater the chance the same company will pass a screen from month to month. The performance we quote in this article and in the Stock Screens area of AAII.com does not take into account, among other things, transaction costs. While commissions on stock transactions have declined significantly over the years, higher turnover strategies will still  incur greater overall transaction costs.

The MAGNET Simple screen has an average monthly turnover rate of 66.3%, meaning that almost seven in 10 companies are new to the portfolio each month. For all strategies tracked by AAII, the median monthly turnover is almost 33%.

In general, approaches that focus on value tend to have less portfolio turnover compared to growth or momentum approaches. In the case of the MAGNET Simple screen, which uses relative price strength over the last 13 and 52 weeks, it is not surprising to see such turnover month to month. High-turnover strategies also tend to be more volatile, outperforming in bull markets and underperforming in bear markets. This is also evident with the MAGNET Simple screen, which lost 70.2% in 2008.

When measuring the performance of a given investing strategy, you should also consider its risk. The Monthly Variability columns report the greatest monthly percentage gain and loss as an indication of the volatility over the last 11-plus years.

The MAGNET Simple screen’s best single-month return has been 52.1% and it has lost as much as 30.0% in one month. By way of comparison, the most that the S&P 500 has gained in a single month since the beginning of 1998 is 9.7%, and its largest single monthly loss was 16.8%.

The Historical Monthly columns also report a variety of monthly risk and return measures over the full study period. Standard deviation is a measure of total risk, expressed as a monthly change indicating the degree of variation in return experienced relative to the average monthly return for a strategy over the test period. The greater the standard deviation, the greater the total risk of the strategy.

The 14.0% monthly standard deviation of returns for the MAGNET Simple screen is the highest figure among all AAII stocks screens, tied with the Murphy Technology screen. The S&P 500 has a monthly standard deviation of 4.8% over the entire test period.

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A Word About Dividends

The Price Gain columns in Table 1 represent the percentage amount each hypothetical portfolio has gained or lost on an annualized and cumulative basis from January 1, 1998, through November 30, 2009.
Keep in mind, however, that these performance numbers do not include dividend payments or dividend reinvestments. Large-cap strategies, such as the Dogs of the Dow, are “penalized” the most by this type of dividend reinvestment exclusion.

The current average dividend yield of the 10 stocks passing the Dogs of the Dow screen is 4.2%; investors holding shares of these companies would actually have a higher return by approximately this amount annually.

Long-Term Winner

There is a new leader among the AAII stock screens based on performance over the last 11-plus years, William O’Neil’s CAN SLIM approach. The CAN SLIM screen has gained 2,763.6% since the beginning of 1998 for an annualized return of 32.5%. Interestingly, the long-term winner from last year, the Zweig approach, was one of the poorest-performing screens in 2009, losing 23.6%.

William O’Neil is publisher of Investor’s Business Daily. The AAII CAN SLIM screen is based on the second edition of O’Neil’s book, “How to Make Money in Stocks: A Winning System in Good Times or Bad.” In the book, O’Neil outlines a stock selection approach developed by studying 500 of the biggest stock market winners from 1953 to 1993. The CAN SLIM approach is based upon the characteristics that these winning stocks possessed prior to their big price run-ups. In general, the CAN SLIM approach combines fundamental and technical factors to seek companies with strong earnings and price momentum, and it tends to isolate smaller-cap growth stocks.

Risk-Adjusted Returns

While long-term performance is an important consideration when selecting a stock screening strategy, you must also pay attention to the risk of the stocks passing a given screen. By considering both the risk and return of an investment methodology, you are ensuring that you are being properly compensated for the level of risk you are assuming.

One measure that combines risk and return is the Sharpe ratio, which describes how much excess return you receive for the extra volatility you endure  by holding a riskier asset—the higher the number, the more return you are getting for the risk.

The calculation of the Sharpe ratio is:

SR = (R – RF) ÷ SD

Where:

  • SR is the Sharpe ratio
  • R is the monthly average return of the investment
  • RF is the rate of return of a risk-free asset (T-bills)
  • SD is the monthly standard deviation of the investment

The Sharpe ratio is a risk-adjusted measure of return that allows you to compare the performance of one portfolio or strategy to another by making an adjustment for risk. If Portfolio A generates a return of 20% while Portfolio B generates a return of 15%, it would be easy to think that Portfolio A is the superior performer. However, if Portfolio A is invested in more volatile stocks than Portfolio B, it could be that Portfolio B has a better risk-adjusted return.

As we mentioned earlier, William O’Neil’s CAN SLIM approach has the best long-term performance of all the AAII stock screens on an absolute price-change basis. However, how does it stack up on a risk-adjusted basis?

From Table 1 we see that the CAN SLIM screen has an average monthly return of 2.7% over the full history period, which is tied with the MAGNET Simple screen as the highest average monthly return among all AAII stock screens. The average variability in monthly returns for the CAN SLIM screen has been 8.8%, as measured by standard deviation. This ranks 12th among all AAII stock screens. Lastly, over this same period, the risk-free rate on T-bills has ranged from 0.01% to 0.66%.

Using these variables to calculate the Sharpe ratio for the CAN SLIM approach, we arrive at a value of 27.7. This is also the highest value among all AAII screens. Therefore, while the risk of the CAN SLIM screen is above average, its returns compensate for the risk.

Looking at the top-performing stock screen for 2009, the MAGNET Simple approach, we see a somewhat different story. Though the screen has one of the highest cumulative returns since 1998, it also has the highest standard deviation of any growth & value strategy. This means that, based on the Sharpe ratio, the MAGNET Simple approach ranks just 23rd out of the 60 AAII stock screens. In other words, it appears that you may be assuming too much risk for the returns being generated by the MAGNET Simple screen.

Stock Screens for All Season: Boom-to-Bust-to-Rebound

When trying to decide upon a stock screening strategy to follow for your own investment portfolio, there are a number of factors to consider. Among them are your time horizon and risk tolerance as well as the amount of time you are willing to devote to monitoring the stocks you choose.

Historical performance is also a component investors follow closely. However, the market served up a stark reminder in 2008 that even those investment strategies with the best long-term performance cannot escape severe market downturns. It did, however, provide a unique learning experience for investors. The last three years have provided a boom-bust-rebound cycle which, fortunately, has been relatively rare in market history. With this as a backdrop, we will look to see how the AAII stock screens fared.

Of the 60 stock screens AAII tracks, 22 managed to generate positive returns over the 36-month period ending November 30, 2009. Looking at Table 2, the top-five performers over the last 36 months (along with their respective style category):

  • O’Neil’s CAN SLIM, +156.7% (growth)
  • Piotroski, +119.6% (value)
  • Est. Rev. 5% Up, +79.2% (specialty)
  • Driehaus, +47.2% (growth)
  • Lakonishok, +30.4% (value)

By means of comparison, the S&P 500 index lost 21.8% over the last 36 months and the typical exchange-listed stock lost 18.6% over the same period.

Those who track the AAII screens on a regular basis will recognize long-term leaders on this list. The CAN SLIM screen is actually the top-performing stock screen since the beginning of 1998, while the Estimate Revisions Up 5% screen ranks second and the Piotroski approach is fourth. Seeing these names among the best-performing methodologies over the last 36 months serves to reinforce their attractiveness over the long-term as well as shorter time periods.

However, it is important to note that none of these screens experienced positive returns in 2007, 2008, and 2009. The Piotroski screen was the only AAII screen to end 2008 with a positive return. However, it was able to do this by essentially being in cash most of the year—no companies passed the screen the last four months of 2008 just as the market was in full swoon. Furthermore, the Piotroski screen lost 1.3% in 2007, a year where the typical AAII stock screen gained 4.2%. For the trailing 36 months, the Piotroski screen averaged two passing companies a month and was out of the market for 12 of the 36 months.

Meanwhile the CAN SLIM approach averaged three passing companies and was out of the market for nine of the last 36 months. For many people, holding such a focused group of stocks is too risky, especially when the market is declining as it did in 2008.

On the other end of the spectrum, the Driehaus screens ranks near the bottom third of all AAII screens in terms of long-term performance. Once again, this drives home the point that it is highly unlikely to find a full-invested, long-only stock investing strategy that will generate positive returns year over year.

It should be noted that the three-year performance numbers for many screens are positive. Furthermore, nearly all of the screens show gains since 1998, a period that encompasses two bear markets. This shows that there is value to sticking to a successful process as opposed to trying to time the market or shifting one’s strategy just because market conditions have changed.

Top Performers: 2009 Price
Gain (%)
P/E
Ratio
(X)
Price-
to-
Book
Ratio
(X)
Price-
to-
Sales
Ratio
(X)
P/E to
EPS
Est
Grth
(X)
5-Yr
Hist
EPS
Grth
(%)
3-5 Yr
Est
EPS
Grth
(%)
Market
Cap
($ Mil)
 
52-Wk
Rel
Strgth
2009* Historical* (%)
MAGNET Simple (Growth & Value) 339.5 1,086.00 No companies currently pass this screen.
Price-to-Free-Cash-Flow (Value) 129.6 676.20 11.9 1.0 0.4 1.8 -30.8 9.5 289.60 9
Foolish Small Cap 8 Revised (Growth & Value) 126.1 900.70 11.8 2.9 3.5 0.4 24.6 30.5 554.90 227
O'Neil's CAN SLIM (Growth) 97.3 2,763.60 No companies currently pass this screen.
Rule #1 Investing (Growth & Value) 97.0 171.20 13.1 2.6 3.0 0.7 43.8 19.8 2,144.40 5
Bottom Performers: 2009                    
MAGNET Complex (Growth & Value) -31.1 694.10 No companies currently pass this screen.
Zweig (Growth & Value) -23.6 1,172.70 10.4 1.6 0.7 0.6 18.8 20.0 476.60 58
O'Shaughnessy—Sm Cap Grth & Val (Growth & Value) -14.3 571.00 17.9 2.6 0.5 1.3 1.9 13.5 639.00 72
Dogs of the Dow—Low Priced 5 (Value) -10.8 -32.80 16.1 1.9 1.0 2.1 4.2 5.9 89,366.80 -20
Stock Market Winners (Growth & Value) -9.0 418.10 No companies currently pass this screen.
All Exchange-Listed Stocks 56.7 182.40 18.0 1.4 1.3 1.5 1.4 12.0 343.10 6
                     
                     
Top Performers: Trailing 36 Months Price
Gain (%)
P/E
Ratio
(X)
Price-
to-
Book
Ratio
(X)
Price-
to-
Sales
Ratio
(X)
P/E to
EPS
Est
Grth
(X)
5-Yr
Hist
EPS
Grth
(%)
3-5 Yr
Est
EPS
Grth
(%)
Market
Cap
($ Mil)
 
52-Wk
Rel
Strgth
2009* Historical* (%)
O'Neil's CAN SLIM (Growth) 97.3 156.70 No companies currently pass this screen.
Piotroski (Value) 67.8 119.60 21.1 0.6 0.3 nmf -8.1 nmf 7.10 141
Est Rev Up 5% (Specialty) 72.9 79.20 20.3 2.0 1.3 1.4 0.7 13.5 1,292.80 49
Driehaus (Growth) 96.5 47.20 27.5 5.7 3.3 1.5 14.8 23.9 620.40 53
Lakonishok (Value) 46.9 30.40 15.2 2.0 0.8 1.5 11.6 11.5 1,580.00 52
Bottom Performers: Trailing 36 Months                    
Dogs of the Dow—Low Priced 5 (Value) -10.8 -63.00 16.1 1.9 1.0 2.1 4.2 5.9 89,366.80 -20
Oberweis Octagon (Growth & Value) 0.7 -44.50 10.4 1.3 0.8 0.3 -10.9 36.0 104.80 111
Murphy Technology (Sector) 24.5 -44.40 10.3 3.5 2.1 0.8 32.7 18.4 83.70 38
Foolish Small Cap 8 (Growth) 31.3 -41.10 10.4 1.6 2.3 1.2 18.9 14.9 131.30 338
Dogs of the Dow (Value) 6.3 -40.90 16.1 2.1 1.1 2.2 14.8 5.9 78,812.70 -11
All Exchange-Listed Stocks 56.7 -18.60 18.0 1.4 1.3 1.5 1.4 12.0 343.10 6
                     

Characteristics of Top Strategies

Table 2 presents the current characteristics of the top- and bottom-performing strategies for 2009 and the boom-bust-rebound cycle of the last 36 months.

No matter what time period you are looking at, basic investment principles do not change. Looking at the underlying characteristics of the five best-performing stock screens over the last 36 months, we find themes that have been echoed time and again:

  • Low multiples, typically relative to historical stock, industry or sector valuations (price-to-book value, price-earnings-to-earnings growth, etc.);
  • An emphasis on consistent sales and/or earnings growth;
  • Strong financials;
  • Price momentum; and
  • Upward earnings revisions and/or positive earnings surprises.

Conclusion

After the doom and gloom of 2008, 2009 has definitely been a breath of fresh air. While they can wreak havoc on our portfolios, years such as 2008 offer learning opportunities to investors. Chief among them is that no strategy performs flawlessly in all types of markets. This only serves to reinforce the importance of being adequately diversified in your overall investment portfolio.

One way to achieve this diversification is by using multiple stock screening methodologies to aid in the stock selection process. However, it is not enough just to pick those strategies with the highest long-term returns. Instead, is it important to understand the underlying forces influencing a strategy’s performance and how this performance may be impacted by changes in economic conditions. Examining the characteristics of an investment methodology may reveal some practical problems you could run into when trying to implement it as part of your own disciplined investment program.

Something else to keep in mind, once you decide upon one or more methodologies to use, is that you should not automatically buy the stocks that pass a screen. Screening is a multi-step process. The first step is to apply the quantitative filters comprising the screen to the stock universe. You then arrive at a group of stocks with the same base set of characteristics. However, this does not necessarily mean they are all good investments. It is important to take these passing companies and, at a minimum, perform additional qualitative analysis to decide whether or not they are right for your portfolio. 

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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