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2011 Year-End Screening Review: A Difficult Year for Stocks and Strategies

by Wayne A. Thorp, CFA

2011 Year End Screening Review: A Difficult Year For Stocks
and Strategies Splash image

After a strong rebound in 2010, the market has seen a muddled 2011. Economic concerns, both domestically and abroad, have had the market indexes on a yo-yo throughout the year. Fears persist of an economic collapse in Europe stemming from the Greek debt crisis, while here at home politicians on both sides of the aisle appear unable or unwilling to address unemployment and the federal debt leading into a presidential election year.

Year-to-date, through December 9, 2011, the S&P 500 is down 0.2% on a simple price-change basis, excluding dividends. If the index doesn’t inch into positive territory over the last weeks of 2011, it will break a two-year winning streak.

This year has been equally difficult on the AAII stock screens. Of the 63 we track at AAII.com, only 24 are currently up for the year and outperformed the S&P 500 year-to-date. The median, or midpoint, price decline for all the screens is 3.8%, compared to a median price gain of 24.9% for the same set of screens in 2010.

Despite the relatively poor performance of the screens as a whole in 2011, one methodology—the T. Rowe Price screen—is having its best year ever since we started testing these strategies in 1998.

Ranking 2011 Performance

Table 1 provides summary performance and volatility statistics for the stock screens we track on AAII.com. All of these screens have been created using AAII’s fundamental stock screening and research database program, Stock Investor Pro, and most of them are pre-built into the software (the exceptions are the Dogs of the Dow and Dogs of the Dow: Low-Priced 5 screens).

Table 1 presents the price change performance (excluding dividends and transactions costs, time and price slippage, etc.) for the various stock selection strategies. The screens are classified by style groups to identify their underlying premises. These style groups are: value, value with price momentum, growth, growth with price momentum, growth and value, growth and value with price momentum, earnings estimates, and specialty.

The AAII stock screens are ranked in Table 1 in descending order by their year-to-date price performance through December 9, 2011, within each of their style groups. At the end of the table, you will also find performance data for several market indexes and averages.

Top Performer of 2011

The top-performing screen for 2011 is one that normally does not garner a lot of attention compared to some of the others we track: T. Rowe Price. This approach is based on the investment style of T. Rowe Price, the founder of investment advisory firm T. Rowe Price Associates, and has generated a price return of 117.4% year-to-date through December 9, 2011.

Price’s approach focused on growth stocks; he defined a growth stock as “a share in a business enterprise that has demonstrated long-term growth of earnings, reaching a new high level per share at the peak of each succeeding major business cycle, and that gives indications of reaching new high earnings at the peaks of future business cycles.” Furthermore, he looked for stocks with earnings increasing faster than the rate of inflation to offset any erosion in the purchasing power of the dollar. The AAII T. Rowe Price screen requires companies to rank in the top 25% of the stock universe based on their three-year earnings growth and in the top 50% for five- and seven-year earnings growth.

T. Rowe Price followed a top-down approach to selecting stocks, paying attention to overall trends concerning social, political and economic influences that could affect the market and particular industries. With regard to specific industries, Price felt it was important to select companies in growing industries, both in terms of volume and earnings.

While T. Rowe Price concentrated on growth, he would not pay any price for that growth. When looking at price-earnings ratios, he preferred not to buy stocks trading at high levels relative to their historical average. To capture this element of Price’s investing philosophy, the AAII T. Rowe Price screen looks for stocks with a current price-earnings ratio lower than its five-year average.

T. Rowe Price also used a number of secondary factors. The most important among them was good management, since good management can cope with many other factors that may be unfavorable and possibly turn things around. Ideally, management’s interests are aligned with those of shareholders; therefore, the AAII T. Rowe Price screen requires insiders to own at least 20% of the company’s shares. Price also looked for companies with high returns on assets and capital, believing that companies should be able to lower production costs and develop expanding markets without reducing returns. Therefore, the AAII T. Rowe Price screen requires companies to have a return on assets that exceeds its industry median over the trailing 12 months. Lastly, Price preferred companies operating in industries lacking cut-throat competition, which would diminish growth prospects. Typically speaking, industries with historically high margins are those lacking stiff competition. Otherwise, companies would drive down their margins while engaging in pricing wars, expensive marketing campaigns and the like. Furthermore, companies with margins significantly higher than their competition, and that can maintain them over time, are viewed as having some competitive advantage, called “moat.” For the AAII T. Rowe Price screen, we require that net profit margin over the trailing 12 months exceed net margin from five years ago. In addition, the operating margin over the trailing 12 months must be greater than the five-year average.

  Price Gain (%) Avg Ann’l Price Gain (%) Price Gain (%) Historical Annual
Risk & Return
Monthly
Variability (%)
Largest
 
Monthly
Holdings
3
Yr
5
Yr
10
Yr
Since
Incep
Bull
Mkt**
Bear 
Mkt**
Risk
Index (X)
Risk-Adj
Return (%)
YTD* 2010 2009 2008 Gain Loss Avg # Turnover %
Value Screens
Weiss Blue Chip Div Yield 9.1 26.9 27.9 -26.2 22.1 6.3 9.2 10.2 113.2 -43.1 1.22 9.1 16.0 -16.8 13 25.2
Dogs of the Dow: Low Priced 5 9.1 17.3 -7.7 -58.7 3.3 -13.6 -4.1 -0.8 136.5 -82.9 1.60 -3.7 27.6 -34.8 5 15.0
Graham—Defensive Investor (Non-Utility) 8.6 31.4 57.9 -32.0 33.9 13.5 17.4 17.3 182.5 -52.1 1.38 13.7 25.8 -17.3 20 20.8
Dogs of the Dow 7.6 19.4 8.1 -45.4 10.8 -5.3 -1.0 0.6 117.7 -69.0 1.23 -0.2 17.1 -23.4 10 7.1
Graham—Defensive Investor (Utility) 6.4 4.6 7.9 -18.4 5.9 0.9 6.9 8.0 42.2 -31.4 0.89 8.5 12.0 -13.4 19 13.9
Graham—Enterprising Investor -1.0 43.5 48.5 -40.7 33.7 11.6 22.4 19.7 150.8 -50.3 1.71 13.2 33.1 -23.4 4 44.3
Price-to-Free-Cash-Flow -8.1 39.2 147.2 -41.5 53.8 8.9 18.0 18.6 345.4 -62.8 1.77 12.2 51.2 -31.7 30 22.4
O’Shaughnessy: Value -10.0 7.4 31.5 -49.1 10.4 -8.5 2.3 3.9 85.4 -69.1 1.33 3.9 22.0 -23.8 50 19.7
Magic Formula  -30.8 26.6 97.0 -36.3 25.6 2.2 9.4 10.4 104.8 -51.6 1.64 7.9 30.7 -22.4 30 24.8
Schloss -31.5 12.5 57.5 -23.1 5.2 -3.7 8.8 11.6 23.1 -37.6 1.85 8.1 27.1 -40.4 13 54.4
Cash Rich Firms -33.1 14.4 56.9 -38.0 7.7 -4.2 5.5 9.6 31.8 -45.6 1.38 8.1 17.6 -20.7 31 25.1
Fundamental Rule of Thumb -33.6 17.7 92.1 -41.5 20.7 0.0 15.5 14.6 88.1 -57.0 1.68 10.3 33.8 -19.2 50 22.1
Piotroski: High F-Score -34.9 138.8 34.6 -35.3 33.5 6.0 22.1 22.9 161.3 -53.6 2.00 13.5 43.1 -42.0 24 23.1
 
Value Screens With Price Momentum
O’Shaughnessy: Small Cap Growth & Value 0.6 26.1 -3.3 -32.4 7.2 2.4 17.3 17.6 52.9 -50.6 1.51 13.0 18.5 -18.2 25 48.8
Lakonishok -1.9 32.7 53.5 -23.7 27.0 11.8 14.5 14.4 114.9 -32.5 1.19 12.7 16.6 -17.9 30 90.0
O’Shaughnessy: Growth Market Leaders -2.0 15.7 12.6 -44.5 8.4 -4.2 2.8 5.1 44.9 -50.5 1.19 4.9 13.6 -18.6 10 42.7
O’Shaughnessy: All Cap -5.0 29.4 23.3 -40.9 16.8 0.4 11.7 11.3 83.8 -52.1 1.34 9.5 18.4 -21.5 23 35.9
O’Shaughnessy: Growth -6.3 21.3 22.4 -38.2 12.3 0.1 15.3 15.6 73.5 -57.2 1.51 11.7 18.6 -17.9 50 38.0
O’Shaughnessy: Tiny Titans -20.9 21.1 71.1 -56.4 17.3 -5.8 19.2 24.8 79.5 -67.3 1.93 14.8 37.4 -21.0 25 42.4
                                 
Growth Screens
IBD Stable 70 2.7 21.2 56.0 -37.2 25.1 2.4 7.9 9.3 116.8 -50.6 1.18 8.5 18.4 -21.9 44 11.8
Return on Equity -4.5 32.0 40.0 -33.8 23.4 4.2 11.5 12.6 111.2 -47.2 1.27 10.8 14.6 -22.2 33 21.1
Inve$tWare Quality Growth -7.5 17.3 39.6 -24.1 16.8 0.5 3.9 5.1 80.3 -44.7 1.22 4.9 18.2 -22.0 22 11.7
Dual Cash Flow -20.3 31.0 76.0 -46.8 24.4 -1.5 8.6 13.9 121.9 -61.0 1.55 10.4 34.7 -23.6 68 31.2
 
Growth Screens With Price Momentum
O’Neil’s CAN SLIM -4.3 -9.6 97.3 -10.5 13.9 14.0 19.5 25.9 48.0 -10.1 1.84 15.9 69.6 -23.1 7 57.3
Foolish Small Cap 8 -6.7 25.2 48.1 -53.5 22.6 -4.2 8.1 11.7 130.0 -67.7 2.14 7.6 38.8 -22.5 19 36.3
Kirkpatrick Growth -7.6 15.3 80.2 -34.0 26.9 19.9 21.9 19.1 110.5 -38.7 2.18 10.9 64.1 -23.1 12 61.8
Driehaus -12.3 65.7 106.0 -42.7 45.5 17.4 13.7 12.0 231.9 -53.4 2.27 7.5 51.3 -25.7 15 63.5
O’Neil’s CAN SLIM Revised 3rd Edition -22.9 42.7 16.8 -26.3 7.9 4.5 7.0 16.1 27.7 -27.8 1.85 10.5 52.7 -26.7 8 65.4
 
Growth & Value Screens
T. Rowe Price 117.4 11.9 40.1 -47.8 24.3 4.1 6.9 11.2 84.9 -40.0 1.68 8.3 33.5 -20.0 10 34.8
Buffett: Hagstrom 9.8 27.7 30.0 -25.8 23.1 8.9 12.3 14.3 115.6 -39.8 1.11 13.3 13.2 -19.0 30 20.3
Buffettology: EPS Growth 5.6 20.5 57.5 -36.9 25.7 5.5 8.6 9.5 123.3 -48.4 1.22 8.6 15.1 -20.8 45 11.8
Dividend Screen: Non-DRPs 3.5 25.3 25.4 -31.7 18.2 0.7 11.3 12.2 94.4 -48.1 0.91 13.0 17.6 -15.3 30 28.4
Rule #1 Investing 2.2 40.0 99.8 -43.2 43.2 6.1 5.3 10.3 212.4 -54.0 1.74 7.7 27.0 -26.8 15 25.9
Kirkpatrick Bargain 1.6 9.4 22.2 -25.3 11.2 9.0 12.3 7.9 72.6 -43.2 1.37 6.9 21.1 -21.7 14 64.3
Dividend Screen: DRPs 1.6 19.8 29.4 -24.2 19.0 -0.9 5.4 7.7 114.0 -50.4 1.11 7.3 20.5 -18.2 30 26.0
Dividend (High Relative Yield) 1.5 19.4 16.4 -21.4 12.9 0.1 6.1 7.6 71.7 -40.4 0.96 7.7 12.5 -14.2 42 19.9
Buffettology: Sustainable Growth 0.9 18.4 68.0 -28.9 26.1 7.2 10.4 10.7 121.0 -41.9 1.28 9.3 16.5 -20.4 32 13.1
Templeton -0.6 22.4 54.7 -36.6 11.2 -0.1 6.1 8.4 61.9 -51.3 1.21 7.6 14.5 -23.1 24 27.3
Price-to-Sales -3.1 29.6 47.1 -38.5 24.8 3.1 12.5 15.4 128.7 -55.1 1.33 12.6 18.3 -20.6 55 39.2
Neff -3.6 35.0 52.5 -33.6 33.9 4.3 16.1 18.9 176.7 -52.8 1.63 13.1 32.6 -21.7 22 33.4
Wanger (Revised) -3.8 12.5 24.7 -36.3 22.1 6.3 9.9 7.0 113.2 -43.1 1.43 6.1 22.8 -19.8 31 27.2
Kirkpatrick Value -4.4 -25.5 -8.9 -3.7 -12.4 4.4 11.7 11.7 -24.5 -23.3 2.24 7.5 49.0 -25.3 2 75.6
Dreman -12.3 22.7 37.2 -34.9 17.4 -4.4 8.0 9.4 82.1 -55.0 1.24 8.3 23.9 -22.2 21 32.4
Zweig -21.3 12.8 -13.3 -33.9 -4.0 -9.1 12.4 20.1 9.3 -54.4 1.81 12.9 32.7 -24.2 12 41.5
Murphy Technology -26.3 40.0 28.8 -49.7 16.5 -9.7 -13.2 -6.5 56.1 -58.3 2.81 -25.5 58.5 -44.9 11 21.8
Lynch -28.0 24.9 82.8 -37.3 21.0 4.8 13.9 12.8 94.0 -47.5 1.20 11.4 18.9 -21.3 26 22.0
Fisher (Philip) -50.5 9.2 107.9 -43.1 8.1 -6.4 -0.1 2.6 36.3 -58.2 2.15 0.9 32.8 -27.9 22 31.8
Foolish Small Cap 8 Revised -52.8 15.4 161.0 -60.6 11.3 -7.3 8.9 14.1 54.6 -64.0 2.14 8.7 28.1 -31.1 7 31.8
 
Growth & Value Screens With Price Momentum
Stock Market Winners 21.9 124.6 -9.0 -34.7 34.2 11.9 22.2 21.0 226.4 -51.3 1.48 15.5 22.0 -23.4 12 61.0
MAGNET Simple 18.4 56.1 339.5 -70.2 99.7 14.9 27.5 24.8 850.5 -75.9 2.91 11.2 52.1 -30.0 3 66.3
MAGNET Complex 6.9 -20.4 -31.1 -33.7 -16.3 -12.4 -3.3 14.7 -24.8 -55.9 2.74 7.9 63.0 -27.3 2 71.1
Value on the Move—PEG With Hist Growth 2.4 31.7 23.9 -38.3 20.5 4.8 14.0 14.0 99.6 -50.1 1.03 13.7 12.7 -19.1 86 36.0
Value on the Move—PEG With Est Growth 0.8 29.7 24.2 -37.2 19.7 5.9 20.4 19.0 99.0 -50.2 1.31 15.4 15.7 -23.1 43 44.2
Oberweis Octagon -13.1 78.4 2.1 -56.8 15.0 -3.0 9.6 12.1 96.0 -70.6 1.92 8.2 24.6 -23.2 17 41.5
ADR Screen -22.9 18.8 53.2 -58.7 15.2 -5.3 9.3 7.2 77.6 -68.7 1.45 6.2 31.1 -29.7 25 43.7
Muhlenkamp -47.8 2.7 45.2 -24.5 -5.6 -13.4 2.3 5.6 -0.9 -49.0 1.34 5.2 21.0 -17.6 20 24.2
 
Earnings Estimates Screens
Dreman With Est Revisions 17.9 26.5 62.9 -37.1 33.8 9.6 21.0 15.5 140.0 -39.9 1.36 12.5 21.4 -26.2 13 82.2
Est Rev: Up 5% 7.1 35.9 86.3 -18.4 42.2 22.0 28.9 28.9 168.9 -23.4 1.77 18.0 30.8 -21.7 45 92.0
Est Rev: Up 3.2 28.8 53.9 -31.2 29.0 9.7 16.3 16.2 121.1 -40.1 1.27 13.6 14.4 -18.6 178 80.6
P/E Relative -1.9 29.6 51.8 -15.8 29.4 10.7 18.1 16.5 111.2 -27.6 1.13 15.0 18.4 -18.3 33 76.9
Est Rev: Down -14.5 26.8 57.6 -42.6 22.4 -4.9 -0.8 0.3 112.0 -59.9 1.60 -1.9 25.0 -25.3 212 79.3
Est Rev: Down 5% -30.3 30.3 76.0 -47.8 19.6 -8.7 -4.3 -1.0 103.4 -63.8 1.96 -5.8 33.5 -30.5 77 88.7
                                 
Specialty Screens
Insider Net Purchases -32.6 7.4 59.0 -51.7 5.2 -13.2 -0.5 -2.7 47.0 -65.5 1.82 -8.1 27.8 -27.2 28 29.6
 
Indexes
S&P 500 -0.2 12.8 23.5 -38.5 11.6 -2.3 0.9 1.9 69.6 -52.6 1.00 1.9 10.8 -16.8    
 S&P 500 Growth (w/divs) 4.6 15.0 31.6 -33.9 16.9 2.7 2.3 3.5 81.5 -44.4 1.11 3.4 10.8 -16.5    
 S&P 500 Value (w/divs) -2.3 15.1 21.2 -38.5 11.2 -2.6 3.6 3.1 78.5 -56.0 0.99 3.1 11.3 -17.1    
S&P MidCap 400 -2.4 24.9 35.0 -37.3 19.7 1.8 6.2 7.3 96.6 -50.5 1.20 6.7 14.8 -21.8    
 S&P MidCap 400 Growth (w/divs) 1.5 30.6 38.1 -36.9 22.9 4.7 7.6 11.0 105.0 -47.7 1.32 9.3 19.0 -22.2    
 S&P MidCap 400 Value (w/divs) -3.5 22.8 33.7 -33.4 18.5 1.7 7.5 6.4 95.6 -49.4 1.11 6.1 15.7 -21.8    
S&P SmallCap 600 -0.3 25.0 23.8 -32.0 17.4 0.5 6.6 6.1 99.3 -52.2 1.27 5.7 17.3 -20.2    
 S&P SmallCap 600 Growth (w/divs) 5.3 28.0 30.7 -32.2 22.2 4.3 8.6 7.8 120.0 -51.1 1.32 6.9 17.0 -21.7    
 S&P SmallCap 600 Value (w/divs) -1.7 24.7 20.6 -28.9 15.8 -0.4 7.0 6.7 94.3 -51.0 1.22 6.2 18.4 -19.6    
Dow Jones 30 5.2 11.0 18.8 -33.8 10.9 -0.3 2.0 3.2 70.5 -49.3 0.97 3.2 11.8 -15.1    
NASDAQ 100 4.5 19.2 53.5 -41.9 24.6 5.1 3.7 6.3 105.5 -50.1 1.84 5.3 25.0 -27.5    
All Exchange-Listed Stocks -11.1 26.2 65.8 -46.3 24.1 -0.8 9.0 9.1 116.6 -58.6 1.39 7.7 23.9 -22.1    
 
See the AAII Stock Screens area on AAII.com for details on each approach.
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Like some of the other top-performing screens of the last few years, the T. Rowe Price approach generated its stellar 2011 performance by being out of the market for seven months of the year and relying on the performance of only a handful of stocks when it was invested. At the far right of Table 1, under Monthly Holdings, we report portfolio holdings over time—the average number of stocks passing a screen each month since we began testing in 1998. Historically, the T. Rowe Price screen has generated, on average, 10 passing companies a month. This year was the first time in the screen’s history that it failed to produce at least one passing company in any given month.

The Turnover % column under Monthly Holdings in Table 1 gives you an idea of how many stocks “fall out” of a given screening strategy month-to-month. Our backtesting methodology has each portfolio being rebalanced at the end of each month. Only those stocks passing a screen from one month to the next are kept in the portfolio. If a stock fails to pass the screen the following month, we assume it is sold from the portfolio. The lower the percentage turnover, the greater the likelihood that the same stock will pass a screen in subsequent months. The performance figures we quote for all the screens we track on AAII.com do not take into account transaction costs such as commissions or bid-ask spreads, among other things. While commissions on stock transactions, especially when using an online discount broker, are small, higher turnover strategies will still incur higher overall transactions costs, which will have an adverse impact on your investment performance.

The T. Rowe Price screen has averaged monthly turnover of 34.8% since the start of 1998, meaning that slightly more than one-third of the stocks in the hypothetical portfolio are new each month. For all screening methodologies tracked by AAII, the median monthly turnover is 33.4% over the testing period.

Generally speaking, value-oriented strategies tend to have less portfolio turnover compared to those focusing on growth. Adding price momentum elements to a methodology also tends to increase the overall portfolio turnover. The T. Rowe Price screen has no price momentum elements to it. It focuses on long-term earnings growth, low price-earnings ratios relative to historical levels and financial measures that rely on data that change quarterly.

When determining the appropriateness of an investment strategy, you should consider risk as well as performance. The Monthly Variability columns in Table 1 report the greatest monthly percentage increase and loss since the beginning of 1998 as one indication of volatility.

The T. Rowe Price screen’s best single month over its history was 33.5%, which came during July of this year, while its worst single-month loss was –20.0%. By means of comparison, the most the S&P 500 has gained in a single month since the start of 1998 was 10.8% this past October; the index’s largest single monthly loss was –16.8%.

The Historical Annual Risk & Return columns offer additional measures of portfolio volatility and risk/return profiles over the study period from the start of 1998 through December 9, 2011. The risk index compares the variability of returns, as measured by the standard deviation of return, for a given stock screening strategy to that of the volatility of a benchmark, in this case the S&P 500. Standard deviation is a measure of return volatility computed using monthly returns since the beginning of 1998. The risk index divides the standard deviation of a strategy’s return by the standard deviation of return for a benchmark, in this case the S&P 500. The risk index provides a relative measure of risk by comparing the variation in return for a screen since the beginning of 1998 to the typical variation in return for the benchmark index. The risk index of the S&P 500, therefore, is 1.00; methodologies with a risk index below 1.00 are below average in risk. For example, the Graham—Defensive Investor (Utility) screen, in the value category, has a total risk index of 0.89, meaning the approach is only 89% as volatile as the S&P 500 historically.

The 2.00 risk index value for the Piotroski: High F-Score screen indicates that, since the beginning of 1998, the monthly variability of returns for the stocks held in this portfolio has been twice that of the S&P 500. This places the Piotroski: High F-Score screen as the 10th-riskiest screen among the 63 screens AAII tracks. It also has the highest risk index among all value strategies AAII tracks. Among all AAII stock screens, the median risk index value is 1.5. This means that the typical stock screen tracked by AAII has 50% more volatility than the S&P 500.

Overall, only three AAII stock screens have a risk index less than 1.00, meaning their risk or volatility is lower than that of the S&P 500. These screens are:

  • Graham—Defensive Investor (Utility) (in the value category), with a risk index of 0.89;
  • Dividend Screen: Non-DRPSs (in the growth & value category), with a risk index of 0.91; and
  • Dividend (High Relative Yield) (in the growth & value category), with a risk index of 0.96.

What It Takes: The Investment Characteristics of the 2011 Winners

 

Table 2 presents the current characteristics of the top- and bottom-performing screening strategies for 2011 and for the total testing period (since 1998) on a risk-adjusted basis.

Compared to the last couple of years, this was not a very good year for the AAII stock screens. Only 24 of the 63 screens we track are up year-to-date as of December 9, 2011, and among these, only four saw double-digit percentage gains. In comparison, 22 of our 63 screens had year-to-date losses of 10% or more.

Note that there is no characteristic data for the T. Rowe Price strategy, this year’s top-performing methodology. For the past several months, no companies have passed the screen, so we were unable to generate statistics for the companies that make up the portfolio.

Market Capitalization

The median market capitalization (share price times number of shares outstanding) of the stocks that make up the major S&P indexes are:

  • $11.0 billion for the S&P 500 index;
  • $2.5 billion for the S&P MidCap 400 index; and
  • $656 million for the S&P SmallCap 600 index.

Among the top 2011 performers, the passing companies of the Stock Market Winners screen currently have a median market capitalization of $94.9 million, which falls into the realm of micro caps. Generally speaking, small-cap strategies fared better in 2011 than large-cap and mid-cap strategies, even though the price performances of the S&P 500 and the S&P SmallCap 600 were about even year-to-date (as of December 9, 2011).

  Price
Change (%)
Market
Cap
($ Mil)
P/E
Ratio
(X)
Price-
to-
Book
Ratio
(X)
Div
Yield
(%)
P/E to
EPS
Est
Grth
(PEG)
(%)
5-Yr
Hist
EPS
Grth
(%)
Est
Long-
Term
EPS
Grth
(%)
 
 
52-Wk
Rel
YTD Ann’l
Risk-Adj
Str
(%)
Top Performers: 2011
T. Rowe Price (Growth & Value) 117.4 8.3 No companies passed the screen as of 12/9/2011.
Stock Market Winners (Gr & Val w/Price Mom) 21.9 15.5 94.9 10.5 1.1 2.7 1.6 7.3 8.0 8
MAGNET Simple (Gr & Val w/Price Mom) 18.4 11.2 3564.6 94.3 6.1 2.5 0.6 -54.3 80.0 210
Dreman With Est Rev (Earnings Estimates) 17.9 12.5 1261.1 10.5 1.4 2.1 0.9 3.0 11.9 -14
Buffett: Hagstrom (Growth & Value) 9.8 13.3 5191.2 19.3 3.9 0.3 1.4 22.2 14.9 23
 
Bottom Performers: 2011
Foolish Small Cap 8 Rev (Growth & Value) -52.8 8.7 2807.6 11.1 12.1 8.9 na 22.1 na 54
Fisher (Philip) (Growth & Value) -50.5 0.9 118.8 5.9 0.8 0.0 0.3 36.5 20.0 -28
Muhlenkamp (Gr & Val w/Price Mom) -47.8 5.2 435.2 6.1 1.0 0.0 0.8 41.4 11.2 -22
Piotroski: High F-Score (Value) -34.9 13.5 14.8 5.1 0.5 0.0 na -5.5 29.6 -42
Fundamental Rule of Thumb (Value) -33.6 10.3 46.4 1.7 0.5 0.0 0.6 27.6 15.0 -63
 
Top Performers: Total History, Risk-Adjusted
Est Rev: Up 5% (Earnings Estimates) 7.1 18.0 819.1 18.2 1.6 0.0 1.4 -1.2 10.3 -2
O’Neil’s CAN SLIM (Gr w/Price Mom) -4.3 15.9 1138.8 22.0 3.8 0.0 1.3 45.7 15.1 56
Stock Market Winners (Gr & Val w/Price Mom) 21.9 15.5 94.9 10.5 1.1 2.7 1.6 7.3 8.0 8
Value on the Move--PEG w/Est Gr (Gr & Val w/Price Mom) 0.8 15.4 6020.7 16.1 2.8 0.8 0.9 10.9 15.6 11
P/E Relative (Earnings Estimates) -1.9 15.0 1602.2 13.8 1.7 1.4 1.2 2.6 12.1 -6
 
Bottom Perfomers: Total History, Risk-Adjusted
Murphy Technology (Growth & Value) -26.3 -25.5 595.5 6.4 1.5 0.0 0.5 37.5 16.8 -36
Insider Net Purchases (Specialty) -32.6 -8.1 221.9 25.8 1.9 0.0 2.1 8.6 10.0 -2
Est Rev: Down 5% (Earnings Estimates) -30.3 -5.8 485.9 14.3 1.1 0.0 1.2 3.3 15.1 -37
Dogs of the Dow: Low Priced 5 (Value) 9.1 -3.7 155199.9 15.4 1.8 4.7 2.1 -6.9 4.6 -1
Est Rev: Down (Earnings Estimates) -14.5 -1.9 1372.5 14.8 1.6 0.4 1.1 9.5 12.7 -19
All Exchange-Listed Stocks -11.1 7.7 415.9 15.3 1.4 0.0 1.2 1.0 12.5 -7
 

Multiples

Both the Stock Market Winners and Dreman with Estimate Revisions screens have price-earnings ratios (price divided by trailing 12-month earnings per share) of 10.5, compared to the 15.3 median value for all exchange-listed stocks currently in the Stock Investor Pro database. The Dreman screen looks for companies with price-earnings ratios that are in the bottom 40% of the stock universe. The Stock Market Winners screen does not have an explicit price-earnings filter; instead, it requires passing companies to have a price-to-book-value ratio less than or equal to 1.5. Another top performer for 2011, the Buffett: Hagstrom screen, uses a variation on the price-earnings-to-earnings growth (PEG) ratio, comparing price-to-free-cash flow to free cash flow growth. Although you wouldn’t know it by its stratospheric 94.3 price-earnings ratio, the MAGNET Simple screen also has a value component. The screen looks for stocks with a forward price-earnings ratio that is no more than half that of the forecasted earnings per share growth rate for the next three to five years. It is also worth mentioning that only one company passed the MAGNET Simple screen as of December 9, 2011: Golar LNG Limited (GLNG) has a price-earnings ratio of 94.3 based on a current share price of $44.34 and trailing 12-month earnings of $0.47 per share.

With its price-to-book-value cap of 1.5, the Stock Market Winners screen has the lowest median price-to-book-value ratio of 1.05. This is 25% lower than the median price-to-book-value ratio of 1.40 for the typical exchange-listed stock.

Looking at the valuations of 2011’s worst-performing strategies, we find that, almost across the board, they all have price-earnings and price-to-book ratios that are lower than those of this year’s winning strategies.

The PEG ratio attempts to balance the trade-off between price-earnings ratios and earnings per share growth rates. Investors are willing to pay more for current earnings when there are reasonable expectations of growth and higher earnings in the future.

One way to compute the PEG ratio is by dividing the normalized price-earnings ratio (price divided by the consensus earnings per share estimate for the current fiscal year) by the estimated earnings per share growth rate for the next three to five years. Normally, companies with PEG ratios near 1.0 are considered fairly valued. Ratios above 1.5 may indicate overvalued stocks, and ratios below 0.5 potentially indicate attractively priced (undervalued) stocks.

Among this year’s top-performing methodologies, two—Stock Market Winners and Buffett: Hagstrom—have PEG ratios above that of the typical exchange-listed stock, while two others have PEG ratios below. In contrast, the three worst-performing screens for which we were able to calculate a PEG ratio all had values significantly lower than the median value for exchange-listed stocks. The Stock Market Winners screen has the highest PEG ratio among the top overall performers at 1.6, mainly attributable to the three-to-five year 8% forecast growth in earnings per share for the passing companies.

Relative Strength

The relative strength index in the table is calculated against the performance of iShares S&P 500 Index exchange-traded fund (IVV), which is used as a proxy for the S&P 500 index. Stocks with performance equal to that of the S&P 500 over the last 52 weeks have a relative strength index value of zero. A relative strength value of 13 indicates that the stock outperformed the S&P 500 by 13%. Negative numbers indicate underperformance relative to the index.

The MAGNET Simple screen, with its one passing company, has a relative strength value of 210, indicating that Golar LNG Limited has outperformed the S&P 500 by 210% over the last 52 weeks. Although the Dreman With Estimate Revisions screen is one of 2011’s best-performing screens, the stocks currently satisfying its criteria have underperformed the S&P 500 by 14% over the last year. Ironically, the worst-performing AAII stock screen for this year—Foolish Small Cap 8 Revised—has a relative strength value of 54% thanks to its single passing company [Terra Nitrogen Company (TNH)], which has outperformed the S&P 500 by 54% over the last year.

Winning Characteristics

  • When looking at those strategies that have achieved long-term success, several common factors are apparent:
  • Low multiples (price to earnings, price to book value, etc.), more on a relative rather than an absolute basis;
  • An emphasis on consistency of growth in earnings, sales, or dividends;
  • Strong financials;
  • Price momentum; and
  • Upward earnings revisions.

—Wayne A. Thorp, CFA

Impact of Dividends

The Price Gain and Average Annual Price Gain columns in Table 1 represent the annualized percentage gain or loss realized by a hypothetical portfolio invested in the stocks passing a given screen over varying time periods from January 1, 1998, through December 9, 2011.

However, these performance numbers do not include dividend payments or dividend reinvestment. Therefore, the results for large-cap strategies, such as the Dogs of the Dow (in the value category), do not benefit from dividend payments or reinvestment.

Currently, the 10 stocks that make up the Dogs of the Dow have a dividend yield of 4.0%; investors holdings shares in these stocks would, therefore, have a higher annual return by approximately this amount.

Risk-Adjusted Returns

While performance is an important consideration when selecting an investment approach, in this case a stock screening strategy, you need to also consider 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 way of considering the risk of a strategy is by calculating a risk-adjusted return that adjusts the return for risk. Strategies with high returns that have above-benchmark standard deviations will have their returns proportionally lowered and strategies with below-benchmark standard deviations will have their returns adjusted upward proportionally.

Calculating Risk-Adjusted Return

 

The formula for calculating the risk-adjusted return is as follows:

Margin Rate + (Benchmark Std Dev ÷ Portfolio Std Dev) × (Portfolio Return – Margin Rate)

Where:

  • Margin Rate = margin rate (the rate at which you borrow funds); we use 4% for our calculations
  • Benchmark Std Dev = standard deviation of the benchmark, in this case the S&P 500 index
  • Portfolio Std Dev = standard deviation of the portfolio of stocks passing a given stock screen
  • Portfolio Return = return of the portfolio invested in the stocks passing a given stock screen

This calculation assumes that the portfolio return for a given stock screen is higher than the margin rate. If it isn’t, the risk-adjusted return calculation would be as follows:

Margin Rate + (Portfolio Std Dev ÷ Benchmark Std Dev) × (Portfolio Return – Margin Rate)

Following this methodology, we calculated the risk-adjusted returns since inception for all the AAII stock screens.

Risk-Adjusted Winner

Ranking the 63 AAII stock screens by their risk-adjusted return since inception, we see that the Estimate Revisions: Up 5% (in the earnings estimates category) is still the top-performing strategy over the period from January 1, 1998, through December 9, 2011.

The screen looks for companies tracked by more than four analysts that have not had any downward revisions over the last month in their earnings estimates for the current and next fiscal year and have had at least one upward revision. Furthermore, the revisions to the average estimate must be significant enough to increase the consensus estimates for both the current and next fiscal years, by at least 5% over the last month.

The strategy has an annualized risk-adjusted return of 18.0%, versus its non-risk-adjusted return of 28.9% a year since the beginning of 1998, which is also the highest among all the screening strategies we follow. Comparing its annualized standard deviation to that of the S&P 500 index, we find that the Estimate Revisions: Up 5% screen has a annual standard deviation of 29.3% versus 16.5% for the S&P 500, giving it a risk index of 1.77. This means it is 77% more volatile than the large-cap index.

One approach whose risk-adjusted return benefited greatly from its low risk relative to the other AAII stock screens is the P/E Relative screen (in the earnings estimates category). This screen ranks 15th in annualized return since the beginning of 1998. However, with a risk index of 1.13—meaning it is only 13% more volatile than the S&P 500—its risk-adjusted return does not suffer as much as the typical AAII stock screen, which has a risk index of 1.50. In fact, 11 of the 14 screens ranked higher than the P/E Relative screen based on risk-adjusted return had a risk index value greater than 1.5. As a result, many of these screens saw their risk-adjusted returns drop significantly.

Risk-Adjusted Loser

An extreme example of where a high risk index adversely impacted a screen’s risk-adjusted performance is the MAGNET Simple methodology (a growth and value screen with price momentum). The screen begins by looking for stocks with forward price-earnings ratios that are no more than half of the projected earnings growth rate for the next three to five years (a forward PEG ratio of no more than 0.5). From there it requires sales growth over the trailing 12 months to be at least 15% and, finally, relative price strength over the last 13 and 52 weeks to rank in the top 10% of the overall stock universe.

This screen’s average annual price gain return since the beginning of 1998 is 24.8%, placing it third among all AAII stock screens. However, its risk index is 2.91, making it 191% more volatile than the S&P 500, which is also highest for all AAII screens. As a result, the annual risk-adjusted return for the MAGNET Simple screen is only 11.2%, placing it 23rd out of the 63 screens we track. This means the strategy’s price performance has not been high enough to adequately compensate for the level of risk, relative to other AAII screens.

Behind the Scenes of the Top 2011 Strategy

 

The T. Rowe Price screen was one of the few bright spots among the AAII stock screens in 2011. Its 117.4% price gain, year-to-date through December 9, 2011, comes in a year when only four of 63 screens saw double-digit gains and 17 saw losses of over 20%. When evaluating the performance of a given approach, it is useful to look beyond the simple gain/loss data and examine the individual stocks that contributed to the overall return.

The 2011 gains for the T. Rowe Price approach can be attributed to two things: First it was out of the market for a good portion of the year—seven months to be exact—as the market fluctuated wildly in the face of global economic uncertainty. In those months it was invested, the strategy benefited from identifying stocks with solid historical earnings growth that were undervalued relative to historical valuation levels.

For 2011, the T. Rowe Price screen held a total four stocks, averaging less than two holdings in the five months where companies met the criteria. Historically, the strategy has averaged 10 stocks per month—ranking it in a tie for ninth place among all AAII screens in terms of the lowest average number of passing companies. This was the first year since we starting backtesting in 1998 that the screen failed to produce at least one passing company in a month. Investing in a small number of companies makes a portfolio more susceptible to individual stock price movements. While this year it was a benefit to the T. Rowe Price screen, the impact can be equally significant to the downside. Historically, AAII stocks screens with the lowest average number of passing companies are also among with most volatile. With a risk index of 1.68, the T. Rowe Price screen is 68% more volatile than the S&P 500, placing it in the top half of all AAII screens in terms of volatility.

Table 3 presents the four stocks that passed the T. Rowe Price screen in 2011, showing their performance while they were held in the hypothetical portfolio, the number of months held this year, and select current financial data.

UFP Technologies Inc. (UFPT) was the best-performing stock that passed the T. Rowe Price screen in 2011. It was held in the portfolio for only one month—January—and gained 40.8% in that month, turning in the best single-month gain among the four stocks held in the hypothetical portfolio over the course of the year. UFP Technologies designs and manufactures engineered packaging solutions utilizing molded and fabricated foams, vacuum-formed plastics, and molded fiber. UFP’s products include foam, plastic, and fiber packaging solutions, and component products for the manufacturing, medical and scientific, automotive, aerospace and defense, computer and electronics, industrial, and consumer markets.

Company (Ticker) Price
Gain
While
in
Port
(%)
Mos
in
Port
During
2011
P/E
Ratio
(X)
Price-
to-
Book-
Ratio
(X)
Div
Yield
(%)
P/E to
EPS
Est
Grth
(%)
5-Yr
Hist
EPS
Grth
(%)
Est
Long-
Term
EPS
Grth
(%)
Market
Cap
($ Mil)
52-Wk
Rel
Strgth
(%)
 
 
 
 
 
Industry
UFP Technologies (UFPT) 40.8 1 10.1 1.70 0.0 na 60.2 na 98.0 87 Containters & Packaging
Harvard Bioscience (HBIO) 33.6 2 22.3 1.19 0.0 na 26.6 na 110.9 71 Scientific & Tech Instru
TESSCO Technologies (TESS) 29.9 2 8.7 1.22 4.3 0.5 19.1 15.0 107.0 46 Communications Equip
Terra Nitrogen Co. (TNH) 10.6 2 11.1 12.12 8.9 na 22.1 na 2807.6 93 Chemical Manufacturing
Exchange-Listed Stocks 15.3 1.40 0.0 1.2 1.0 12.5 415.9 -7  
 

 

UFP Technologies passed the T. Rowe Price screen on December 31, 2010, and closed that day at $12.19 a share. On January 3, 2011, Zacks Investment Research tabbed the company as a small-cap growth play, which seemed to ignite the stock’s price—it rose to $17.16 by the end of the month. At the end of January, the stock failed to pass the screen because its three-year earnings per share rank had fallen to from 76% to 75%, the cutoff for the T. Rowe Price screen. Furthermore, insider ownership had dropped from 21.2% to 16.8%, below the 20% threshold for the screen.

TESSCO Technologies Inc. (TESS) was the only company held in the T. Rowe Price portfolio in 2011 that had a monthly loss, losing 2.7% in June. The company provides products and value chain solutions to support the construction, operation, and use of mobility and data wireless systems, primarily in the U.S. TESS managed to bounce back in July, gaining 33.5%.

Although 2011 was a very good year for the T. Rowe Price screen, its long-term performance hasn’t been nearly as impressive. Its annual average price gain return since the beginning of 1998—11.2%—places it in the bottom half of all the AAII stock screens (37th out of 63). On a risk-adjusted basis, it moves up one spot with an average annual return of 8.3%. While, historically, the screen has returned a reasonable number of passing companies, it will be interesting to see if the extremely low number of candidates in 2011 is merely a cyclical development or more of a long-term trend.

Conclusion

The AAII stock screens are not intended to be buy or recommended lists. Instead, they allow investors to see how different investment strategies perform over varying market conditions. Since market conditions change, it is important to be adequately diversified to weather the ups and downs of the market.

One way to achieve sufficient diversification is by using multiple stock screening methodologies to help you select stocks. However, it is not enough to simply choose those strategies that have the best long-term performance. Instead, it is useful to understand the forces influencing both the overall market and a strategy’s performance, and how changing economic conditions can impact both the market and individual stocks. Examining the characteristics of an investment methodology may reveal some practical problems you can face when trying to translate quantitative stock screening into real-world portfolio building.

Something else to keep in mind is that, once you decide on which methodologies to follow, you cannot just let the quantitative screens choose your stocks. Screening is a multi-step process. The first step is to apply the quantitative filters to the stock universe to help you arrive at a set of candidates that all share the same base set of characteristics. This doesn’t necessarily mean they are all good investments. It is important to take your list of passing companies and, at a minimum, perform some cursory qualitative analysis to decide whether or not they are right for your stock portfolio.

The AAII Stock Screens

AAII has been developing, testing, and refining a wide range of screening strategies over the years. Many of the screens follow the approaches of popular investment professionals, while others are tied to basic principles of investing. These approaches run the full spectrum, from those that are value-based to those that focus primarily on growth, while most fall somewhere in the middle.

Screens following the approach of an investment professional do not represent their actual stock picks. The rules of each screen are defined by our interpretations of their respective investment approaches. The results of the screening strategies, as well as the criteria for each screen, are programmed into the Stock Investor Pro program and are also posted in the Stock Screens area of AAII.com.

Each month over 60 separate screens are performed using AAII’s Stock Investor Pro and the current companies passing each individual screen are reported. Stock Investor Pro subscribers can perform the screens themselves, while AAII members can access the screening results by going to the Stock Screens area of AAII.com (www.aaii.com/stock-screens). The results are usually posted to the site in the middle of each month using data from the previous month’s end.

The performance of the stocks passing each screen is tracked on a monthly basis. The month-to-month closing price is used to calculate the return, with equal investments in each stock at the beginning of each month assumed. The impact of factors such as commissions, bid-ask spreads, cash dividends, time-slippage (time between the initial decision to buy a stock and the actual purchase) and taxes is 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.

Sell rules are the same as the buy rules: The screens are simply reapplied using each subsequent month’s data. 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.

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.


Discussion

Daniel from AL posted over 2 years ago:

Fine article. The charts presenting top and bottom-performing screens for this year vs. long-term along with the detailed and unbiased analysis help put the total screening methodology in perspective.


Frank from WI posted over 2 years ago:

ON YOUR WEBSITE U MENTION THE T ROWE PRICE SCREEN.
HOW DO I FIND IT???
EWFISHIN3456@AOL.COM


Khadar from AR posted over 2 years ago:

To find T ROWE PRICE SCREEN go to http://www.aaii.com/stock-screens and you will see list of stock- screens used in AAII


Benjamin from IL posted over 2 years ago:

How do I find the stocks passing the O’Neil’s CAN SLIM Screen during 2011 ?


Wayne from IL posted over 2 years ago:

We do not archive the companies that pass the screens each month because, over time, these lists become obsolete due to mergers, acquisitions, bankruptcies, name changes, etc., etc. If you are a subscriber to AAII's Stock Investor Pro program, you can access historical monthly data updates to see which companies passed a screen as of a given date. Wayne A. Thorp, CFA, AAII


Daniel from AL posted over 2 years ago:

Great analysis of the winning screen. In addition to picking winning stocks, the fact that they came in spread over the year at the right time played a huge role in the results. A big gain came in the first month of the year from owning just one stock , and then the gain was passed to the next fresh horse as it went by, compounding the gains.

Consider that if all four stocks had passed in January, and money was invested equally, the portfolio gain for the year would have been the average of the individual gains, or a "mere" 29%.

Perfect (ie,lucky) timing clearly made a huge difference in the results for this screeen.



Dave from WA posted over 2 years ago:

Daniel,
I would agree, using these stock screens can be hazardous to your financial health, as getting a 117% return last year is nothing more than luck - some of course will claim otherwise, as always.

As an investor what you have to be leery of is following any "scheme" that puts you too far off the market average in ANY one year.

In other words consistency is the name of the game, not chasing last years greatest thing.

I will go out on a limb here and say there is no way for a repeat performace this year - at least as a percentage above the market average. I suspect there may even be some "reversion to the mean" this year.


Britni from CA posted over 2 years ago:

Hi Wayne
Great article--thanks.

"Our backtesting methodology has each portfolio being rebalanced at the end of each month."

What is your backtesting methodology? What applications do you use to perform the backtesting?

Thanks.


David from OR posted over 2 years ago:

Nice analysis of the 2011 winners. You mentioned "cursory" qualitative screening after the quantitative screens. What exactly are you talking about? I have been attempting to invest intelligently but always just seem to miss the boat. I have been following the AAII stock superstars since 2005 but haven't seen the returns that it made in the past. I am looking for solid thinking. I have gotten burned by the herd.


Charles from IL posted over 2 years ago:

David, the news headlines are a good place to start; look for anything not reflected in the data that would change your outlook. I also scan through the SEC documents, particularly Form 10-K, which is the company's annual report (http://www.sec.gov/edgar/searchedgar/companysearch.html). I'm looking for anything could be good or bad (e.g. a conflict of interest between the CEO and a company he wants to acquire). I also look at the chart and make I understand why the reasons for the price movement. Finally, look for anything that explains the business model and potential risks the company may be facing. -Charles


Wayne from IL posted over 2 years ago:

We use AAII's Stock Investor Pro fundamenetal stock screening and research database program to backtest our stock screens. For information on the methods we follow to arrive at the performance figures we report, please refer to the FAQ section of the Stock Screens: http://www.aaii.com/stock-screens/faqs


Madhu from NJ posted over 2 years ago:

Dear Wayne Thorp,

A modest request. Is it possibe for AAII to develop and post O'Shaunessey 4th edition screens? Just as you have developed O'Neill revised screen, you might as well develop revised O'Schaunessey screens. I am sure you are aware of the 4th edition revised screens. All the same, for your ready reference, I am listing the three: 1. Value Factor One (made up of 1. Price-to-book 2. Price-to-earnings 3. Price-to-sales 4. EBITDA/EV 5. Price-to-cash flow.) 2. Value Factor Two (adding shareholder yield to the five factors above) and 3. Value Factor Three (substituting buyback yield for sharholder yield in Value Factor Two).

Performance based on as many as 46 years is simply phenomenal: Value Factor One: Average annual return 17.18%; Value Factor Two: 21.19; Value Factor Three: 17.39. Results of Value Factor Two are a combination of value factors AND Relative Strengh of six months. Risk is actually lower with Sharpe Ratio of 0.93. For more details, please refer to What Works On Wall Street, 4th ed., p579-591.

Sorry for such a lengthy email. In case you are too busy and cannot develop these screens in near future, can you help me in developing them?

Thanks and many thanks.


Ted from WA posted over 2 years ago:

I have the same request as Madhu. Curious whether the O'Shaunessey screens might be in the new AAII Dividend Investing service, or whether it might be available on the generally available screens.


Wayne from IL posted over 2 years ago:

I have the book sitting on my desk and hope to get to it in the coming weeks. Wayne A. Thorp, CFA, editor, Computerized Investing


John from VA posted over 2 years ago:

I would request that ya'll try to be consistent and specific when naming screens in your articles and advertisements. For example, in the July 2011 Journal inside the back cover is an ad for SIPRO. In that ad, you list six screens, but not all by the same name that appears in SIpro program. For example, you say that James O'Shaughnessy is up 29.4%. WHICH O'Shaughnessy? There are six to choose from, all quite different.
Thanks


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