Strategies End Mid-Year on Upside of a See-Saw Market

    by John Bajkowski

    Investors have experienced a see-saw of ups and downs during the first half of 2004, as the markets balanced the news of strong overall corporate earnings growth against the impact of rising interest rates, higher oil and commodity prices, growing Middle East violence, and an uncertain presidential race. Thirty-four of the 54 strategies tracked on showed positive gains for the first half of 2004. Overall, strategies investing in smaller-cap companies have outperformed strategies that focus on larger companies during the first half of 2004, and, generally, value strategies have outperformed growth strategies.

    Screening Strategy Results

    Table 1 summarizes the performance and variability of the stock screens built into AAII’s Stock Investor Pro software program and presented within the Stock Screens area of We have been developing, testing, and refining a wide range of screening strategies over the last seven years. Many of the screens follow the approaches of popular investment professionals, while others are tied to basic principles of investing. Most of the strategies aim to be complete investment approaches that examine both primary selection factors to identify good prospects and conditioning filters to exclude troubled or weaker companies. However, some screens focus on a single factor—such as estimate revisions or insider purchases—to examine if these factors help to identify good or poor stock prospects.

    Table 1 presents the price gains for the various investment strategies tracked by AAII, along with index performance data. The screening approaches listed in the table are grouped by a growth versus value orientation, with additional specialty and sector screens broken out separately. Within each grouping, the companies are ranked by year-to-date performance for 2004.

    Figure 1.
    Mid-Year Performance
    Winners: Murphy
    Technology and Zweig

    The value-priced technology screen that follows the Michael Murphy philosophy led all strategies during the first half of 2004 with a 76.8% gain, while the growth and value Zweig approach continued its long-term leadership position with a 932.0% cumulative gain since 1998. Figure 1 traces their performance compared to benchmark indexes.

    The Murphy approach identifies technology stocks with high research and development spending, strong margins, a solid return on equity and high revenue growth, but selling at attractive valuation levels. The 76.8% first-half gain for the Murphy approach was impressive, but it came on the heels of a 33.7% loss in 2003 and a 79.6% loss in 2002. The strategy did well in the technology-driven bull market of the late 1990s, but then collapsed even more dramatically than the technology sector during the bear market that followed. So while the Murphy Technology screen leads the way in 2004, it also has the worst long-term performance record, with a 55.0% cumulative loss since 1998.

    The Zweig approach continued its long-term dominance with a solid 12.1% gain in the first half of 2004. This approach seeks companies with positive growth in quarter-over-quarter earnings, positive year-to-year growth in annual earnings and strong price movement over the last 26 weeks, but trading with price-earnings ratios that are not too high above the market norm. The screen currently favors mid-cap firms located in the construction, energy, financial and healthcare sectors.

    Value Winner

    The Piotroski screen led the value strategies for the first half of 2004 with its 48.7% gain and is also the long-term value leader with its 846.7% cumulative gain since 1998. The screen seeks stocks with low price-to-book values that have strong and improving financial strength. The screen tends to turn up smaller-cap value stocks, which have led the market in the past few years. Companies currently passing the screen come from a wide mix of industries.

    Growth & Value Winner

    The Value on the Move screen, which uses the ratio of price-earnings to the estimated growth rate in earnings (PEG ratio), is the year-to-date leader among the growth-and-value approaches. This screen combines value measures with price and earnings momentum in an attempt to identify reasonably priced stocks on the move. Beyond the PEG ratio, the screen looks for companies with consistent annual earnings, positive quarterly earnings and strong price momentum over the last 26 weeks. Current companies passing the screen tend to be concentrated in the financial, oil and gas operations, and in retail sectors.

    Growth Winners

    Most of the growth strategies suffered losses during the first half of 2004, but the Return on Equity screen led the pack with its 7.4% gain. This screen identifies stocks with above-average earnings and sales growth that have consistently outperformed their peers as measured by return on equity (ROE, net income divided by owner’s equity). Currently, stocks passing the screen tend to be concentrated in the pharmaceutical, medical equipment and technology industries.

    The long-term performance leader within the growth category continues to be the William O’Neil CAN SLIM approach. The category has generated a 620.8% gain over the past six and a half years, but it is down 10.4% year-to-date. The screen looks for companies with rapidly growing earnings that are hitting new highs and exhibiting strong price acceleration. Only a small number of stocks are currently being turned up by the approach; they tend to be financial and technology stocks.

       Screening Methodology
    Each month, over 50 separate screens are performed using AAII’s Stock Investor Pro software 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 clicking on the All Screens button within the Stock Screens area of The results are 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, and equal investments in each stock at the beginning of each month are assumed. The impact of factors such as commissions, bid-ask spreads, cash dividends, 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. 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.

    Risk & Turnover

    When measuring performance, the risk of the strategy should also be considered. The Monthly Variability columns report the greatest monthly percentage gain and loss as an indication of the volatility that occurred over the last six and a half 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, that indicates the degree of variation in return experienced relative to the average for a strategy over the test period. The higher the standard deviation, the greater the total risk of the strategy. The portfolio created using the Murphy Technology screen has exhibited the greatest monthly volatility among these strategies, with its 17.3% standard deviation. The screen’s biggest single-month loss was 44.9%, which occurred during October of 2003 during a month in which most indexes were up strongly. Its biggest monthly gain of 58.5% was observed in January of this year when the four stocks that passed the screen had gains that ranged from 22.6% to 158.0%. Large monthly performance swings are more common with strategies that frequently have only a few passing stocks.

    The Monthly Holdings columns provide data on portfolio holdings over time—the total number of stocks that were in each portfolio over the last six and a half years and the average turnover percentage from month to month. For example, the Piotroski screen has averaged only seven passing companies per month and 21.2% of the stocks that pass the screen one month do not pass the screen the next month. Every month these portfolios are rebalanced and only those companies passing the screen for a given month are held.


    These strategies are based on relatively simple screens that are interpretations of the investment approaches advocated by prominent investment professionals. The strategies attempt to establish a practical set of rules for each approach, which is the first step in any disciplined investment approach. As you look at the performance of the screens, do not blindly follow the strategies with the highest performance. Instead, try to gain an understanding of the forces impacting performance and determine what kind of market environment might be expected in the future. Most importantly, remember that screening is just a first step. There are qualitative elements that cannot be captured effectively by a quantitative screening process. For further information on these approaches, consult the Stock Screens area of 

→ John Bajkowski