Strong Market Performance Powers First-Half 2007 Results

    by Wayne A. Thorp

    If investors are worried about a slowing economy, lingering inflation, and rising interest rates, one would never know it by tracking the market’s performance through the end of May of this year.

    The market managed to shrug off one of the biggest single-day declines in recent memory, when the Dow Jones industrial average dropped over 400 points and the S&P 500 shed almost 3.5% on February 27, 2007. After bottoming-out in early March, the S&P 500 gained almost 12% through the end of May 2007. Time will tell whether June’s lackluster beginning is only a speed bump or a barricade. Despite the market’s recent swoon, the S&P 500 is still up for the year.

    Most of the stock screens tracked on are outperforming the broad market indexes thus far for 2007: Only four of 55 are down for the year while 36 of 55 are outperforming the S&P 500. Mid-cap issues are enjoying the best performance thus far in 2007 as compared to small-cap and large-cap stocks.

    In addition, generally speaking, value-oriented strategies are topping growth-oriented methodologies.

    Stock Screen Results

    Table 1 summarizes the performance and variability of the stock screens we track using AAII’s Stock Investor Pro fundamental stock screening and research database program; screens are also presented within the Stock Screens area of In addition, the table offers index performance data for the same time periods. The screening methodologies listed in the table are grouped by a growth versus value orientation, with additional specialty and sector screens broken out separately. Within each grouping, we rank the strategies in descending order by year-to-date performance for 2007.

    We have been developing, testing, and refining a wide range of screening methodologies and have backtested performance results of hypothetical portfolios invested based on these various approaches going back to the start of 1998.

    Mid-Year Leaders

    Once again, we find the name Benjamin Graham at the top of our performance list for the first half of 2007. This year, however, it is his “Defensive” non-utility screen, which has an impressive year-to-date gain of 35.4%.

    A newcomer has established its long-term dominance, as William O’Shaughnessy’s Tiny Titans screen (which we introduced last year) has a cumulative gain of 3,290.9% since the start of 1998. The Graham—Defensive (Non-Utility) approach identifies larger, non-utility companies with a history of positive, growing earnings and dividend payments, all over the last seven years.

    Figure 1.
    Mid-Year Performance
    Winners: Graham Defensive
    (Non-Utility)and O’Shaughnessy
    Tiny Titans

    The Graham—Defensive (Non-Utility) strategy continues its strong performance dating back to 2005, when it was the top-performing AAII value screen. Since the beginning of 2005, the methodology has generated a cumulative return of over 116%. In comparison, the S&P 500 is up “only” 24.4% over the same period. In addition, the Graham—Defensive (Non-Utility) screen is one of only eight screens AAII tacks that has turned in positive returns in each year since 1998.

    The O’Shaughnessy—Tiny Titans approach is running directly in the middle of the pack of growth and value strategies thus far in 2007, having gained 13.2%. The methodology seeks micro-cap stocks (those with a market capitalization between $25 million and $250 million) with price-to-sales ratios less than one and upward price momentum over the last year. Currently, the screen favors companies in the service sector.

    Long-Term Value Winner

    Value-oriented investment approaches have been enjoying a relatively successful 2007 campaign. To date, every value screen AAII tracks has turned in a positive return, although the two dividend screens are hanging by a thread. The Dividend—DRPs screen has a year-to-date gain of 1.9% and the Dividend—Non-DRPs screen is only up 1.1% for the year.

    The group’s two best overall performers are still struggling to recapture their past glories. The long-term value leader is now the John Neff approach, replacing last year’s mid-term leader, the Joseph Piotroski methodology.

    The Neff screen has a cumulative return of 989.3% and seeks out stocks with low price-earnings ratios relative to growth, and solid forecasted earnings growth and historical sales growth. After being the second-best-performing value strategy in 2003, the screen’s performance has hovered in the lower half of the group and was the second-lowest-performing value screen last year (albeit with a respectable 13.9% gain).

    The former value leader, the Piotroski screen, has suffered in recent years from a relatively low number of passing companies, or none at all. In 10 of the last 14 months, no companies met all of the screen’s criteria, which look for stocks with low price-to-book ratios that meet each of nine financial strength requirements. With strategies where there are only a few passing companies, your exposure to individual company risk is higher (the diversification benefits are lower). This magnifies the performance of individual stocks, which for the stocks recently passing the Piotroski screen has not been very good. Historically, the Piotroski’s average number of monthly holdings has been five—among the lowest of all the methodologies AAII tracks.

    Growth & Value Winner

    At this point in the year, only one of the growth-and-value strategies has a negative return—the Muhlenkamp screen is down 0.8%. Perhaps equally impressive is that, among the gainers for the year, all but one has year-to-date returns of at least 10%.

    Once again, the Oberweis Octagon leads the group at mid-year with a 34% gain. This eight-step approach isolates aggressively growing companies with high relative price strength that are also reasonably priced. One-third of the current passing companies operate in either the oil and gas operations or oil well services and equipment industries.

    Growth Winners

    We also see the same name at the top of the growth strategies for year-to-date performance: The momentum-oriented stock-picking methodology of Richard Driehaus has gained 30% thus far in 2007. The Driehaus approach seeks small- and mid-cap companies with increasing annual earnings growth that have had “significant” positive earnings surprises, and have a rising stock price. This methodology is also relatively volatile, as its monthly standard deviation of performance (a measure of risk) is the second highest among all strategies AAII tracks. The current set of passing companies is focused in the biotech, medical equipment and sales, and software and programming industries.

    The long-term performance leader within the growth category continues to be William O’Neil’s CAN SLIM approach. The methodology has generated a 1,373.6% gain over the last nine and a half years. The CAN SLIM strategy identifies companies with a relatively low float (shares outstanding less those shares held by insiders) exhibiting strong quarter-on-quarter earnings growth as well as a history of annual earnings increases and strong price momentum over the last year.

    The CAN SLIM screen is another that has a relatively small number of passing companies, although it has not suffered the same fate in terms of performance as the Piotroski screen. On average, nine companies pass the CAN SLIM screen each month, but in each of the last 13 months, the number of companies passing the screen has been below the historical average.

    Risk and Turnover

    When measuring the performance of any individual investment or investment approach, you also need to consider the risk of the asset or strategy. 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 the 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 nine and a half years.

    Table 1.
    Performance of Stock
    Screens on AAII’s Web
    Site Ranked by
    2007 YTD Return

    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, you are compensated for risk through higher returns. The Murphy Technology growth screen has the highest monthly standard deviation of the methodologies AAII tracks at 15.1%. However, it also has the lowest cumulative return of –32.7%. The Dividend Screen—Non-DRPs approach has the lowest monthly standard deviation of 3.7%.

    Table 1.
    Performance of Stock
    Screens on AAII’s Web
    Site Ranked by
    2007 YTD Return (con't)

    The Monthly Holdings columns 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 nine and a half years, and the average percentage turnover from month-to-month.


    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 have the discipline to follow these rules instead of allowing your emotions to dictate your buy and sell decisions.

    Many of 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 pitfall to avoid when looking at the performance of these strategies 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. The results of any screen are not a “buy” or “recommended” list. There are qualitative elements to consider that cannot be quantified in a mechanical screening process. 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 to earn a place in your investment portfolio.

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

       How We Evaluate the Screens

    The AAII Stock Screens are designed to provide you with access to a wide range of stock strategies and investment approaches, as well as the individual companies that pass each investment screen.

    Each month, over 50 separate screens are performed using AAII’s Stock Investor Pro software. Approaches run the gamut, from value-based to growth-based, large cap to small cap, some specialty approaches and many that fall in between. The complete results are reported each month at

    How Returns Are Calculated

    The performances of the stocks passing each screen are tracked on a monthly basis. Month-to-month closing prices are used to calculate returns, 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.

    Coverage on

    AAII members can access the screening results by clicking on the AAII Stock Screens link, listed under Portfolios in the left-hand column of

    At, we report the return performance (based on price changes) of all of the screens in the Performance section. In addition, for each screen, we list all of the companies currently passing the screen.

    Screening results are posted to the site in the middle of each month, using data from the previous month’s end.

    Stock Investor Pro subscribers can perform the screens themselves using the pre-built screens provided in the software or by recreating the screens themselves.

→ Wayne A. Thorp