Winners and Losers in the 2003 Performance Race

    by John Bajkowski

    The market crashed through a wall of worry to most likely finish its first positive year of the millennium. The S&P 500 propelled forward 22.1% through December 12, 2003, having overcome the fear and uncertainty of Iraq, mutual fund scandals, a jobless economic recovery, and spikes in the cost of fuel.

    But the AAII stock screens were not left eating dust. Table 1 presents the stock screens tracked on And the winners are:

    • The small-cap value Piotroski approach was the leading approach in 2003 with a rocketlike 142.3% gain.

    • The growth and value Zweig approach continued its long-term leadership position with a cumulative gain of 806.4% since 1998.
    Small-cap issues continued to outperform larger companies with a 35.5% gain, marking their fourth year of outperformance. Historically, small-cap performance tends to be streaky, and now that small-cap price-earnings ratios are more in line with larger-cap stocks, time will tell if the winning streak will continue.

    Value strategies tended to perform better than growth approaches across all market capitalization segments, although the difference was more pronounced with mid- and large-cap stocks.

    The technology-heavy Nasdaq 100 exhibited a strong reversal from its losing days, gaining 44.0%, compared to a 37.6% loss for 2002. Of course, a student of math can tell you that losses and gains are not symmetrical. An investor must obtain a 60.2% gain on an investment to make up for 37.6% loss.

    How They Performed

    Table 1 summarizes the performance and variability of the stock screens built into AAII’s Stock Investor Pro software program and presented on

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    The table presents the price change for the various investment strategies that are tracked, along with index performance data. The screening approaches listed in the table are grouped according to growth versus value orientation, with additional specialty and sector screens broken out separately. The companies are ranked by 2003 performance within each grouping. When examining the figures, it is important to keep in mind that past performance is no guarantee of future success. Many of the winners in 1998 and 1999 hit the wall in the bear market that followed.

    While the market had its ups and downs in 2003, overall most market segments participated in the market rally. All but one of the screening strategies tracked on crossed the finish line with positive gains for 2003. The Murphy low price-to-growth-flow strategy lost 38.1% in 2003 through December 12. While most technology stocks exhibited strong performance, this value-oriented technology screen had difficulty coming up with stocks for its hypothetical portfolio—most months only one or two stocks passed the screen. In situations such as that, a significant market move by one stock will strongly impact the results of the overall screen. During September, the single stock portfolio suffered a 44.9% loss when the Internet search tool LookSmart announced that Microsoft would not renew its licensing and distribution agreement with LookSmart.

    AAII has been developing, testing, and refining a wide range of screening strategies over the last five 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. There are even a number of specialty screens that attempt to gauge the stock selection impact of a single variable—such as the short ratio.

    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

    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 clicking on the All Screens link within the Stock Screens area of 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.

    The 2003 Winner

    The screen based on the low price-to-book strategy developed by Joseph Piotroski, an accounting professor from the University of Chicago, shot past all other screening strategies in 2003 with a 142.3% gain through December 12.

    The price-to-book-value ratio is determined by dividing market price per share by book value per share. Book value is generally determined by subtracting total liabilities from total assets and then dividing by the number of shares outstanding. It represents the value of the owners’ equity based upon historical accounting decisions.

    The Piotroski screen starts with stocks with a price-to-book ratio that rank in the lowest 20% of the entire Stock Investor Pro database. Piotroski found that most stocks trading with an extremely low price-to-book-value were either neglected or financially troubled firms. He found that either situation can create buying opportunities—after checking on financial strength—especially when studying smaller-cap stocks.

    Piotroski developed a nine-point scale that helps to identify stocks with solid and improving financials. Profitability, financial leverage, liquidity, and operating efficiency are examined using popular ratios and basic financial elements that are easy to use and interpret.

    For this screen, a passing stock is required to have a perfect score of nine.

    The Monthly Holdings columns in Table 1 provide data on portfolio holdings over time—the average total number of stocks that were in each portfolio over the last six years and the average turnover percentage from month to month. On average, seven companies have passed the Piotroski screen, but during 2003 the screen averaged only four passing companies. Its strong 2003 performance came from holding only a handful of companies.

    The Percent Turnover column gives an indication of the how many stocks leave a given strategy from month to month. Every month, these portfolios are rebalanced and only those companies passing the screen for a given month are held. The lower the percentage turnover, the greater the chance that a company will pass a screen month after month.

    The Piotroski screen has averaged a 21.1% monthly turnover rate, which is below average for the strategies tracked by AAII.

    As a general rule, approaches that focus on value tend to have less portfolio turnover than the pure growth approaches; they also tend to be less volatile and outperform other approaches during bear markets.

    The Piotroski low price-to-book screen led the pack in 2003 with a concentrated portfolio of micro-cap value. But remember that past performance is no guarantee of future success.

    The Piotroski screen was also the best-performing strategy in 2001, but suffered a 15.9% loss in 2002.

    When measuring performance, the risk of the strategy should also be considered. The Monthly Variability columns report the greatest monthly percentage gain (High) and loss (Low) as an indication of the volatility that occurred over the last six years.

    The Piotroski approach had a maximum loss of 17.2% in value during a single month, and has gained as much as 34.3% in one month. By way of comparison, the most that the S&P 500 index gained in a single month was 9.7%, and its largest single monthly loss was 14.6%. 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 9.4% monthly standard deviation of the Piotroski screen is the highest figure in the value category and well above the 5.2% figure of the S&P 500.

    The Long-Term Winner

    The Total Price Change column in Table 1 represents the percentage amount each test portfolio has appreciated or lost from January 1, 1998, through December 12, 2003. It does not include dividends. Large-cap value strategies, such as Dogs of the Dow, would be impacted the most by this type of dividend reinvestment exclusion.

    The current average dividend yield of the Dogs of the Dow screen is 3.9%; shareholders of these stocks would actually have a return that is higher by approximately this amount annually.

    The strongest gain over the past six years comes from the screen using the Zweig approach, which is up 806.4% cumulatively. By way of comparison, the S&P 500 has gained 10.7% over the same period of time.

    Figure 1.
    Winning Performance:
    Piotroski and Zweig

    Martin Zweig is a former professor who became a newsletter writer and money manager. Our interpretation of his strategy is based upon his book “Martin Zweig’s Winning on Wall Street” (Warner Books, 1997), in which he outlined how to identify companies with strong growth in earnings and sales, a reasonable price-earnings ratio given the company’s growth rate, insider buying (or at least an absence of heavy insider selling), and relatively strong price action.

    This growth and value approach examines trends in both quarterly and annual sales and earnings growth, with an emphasis on consistent and strong results.

    Zweig believes that a price-earnings ratio can be too high or too low. Like Piotroski, he feels that there are two types of companies with low price-earnings ratios—those that are experiencing financial difficulties and neglected companies.

    The risks of investing in financially troubled firms, in Zweig’s opinion, are too great to justify the investment in them, since the risk of these firms going under overshadows any potential “value” in these stocks.

    Neglected stocks, on the other hand, are ignored by the market and often exhibit extraordinary performance once discovered.

    The price-earnings ratio constraints for the Zweig growth and value screen consist of a minimum level of 5.0 to avoid potentially troubled firms and a maximum level of 1.5 times the median price-earnings ratio of the entire Stock Investor database (to avoid overpriced firms).

    The final element of the Zweig screen looks for companies exhibiting price momentum by requiring that any passing company outperform the S&P 500 over the last half-year.


    Stock screening attempts to develop a practical set of rules for each strategy, which is the first step in any disciplined investment approach. Examining their investment characteristics reveals many of the practical problems that you may run into when trying to develop your own disciplined approach to investing.

    As you look at the performance of these screens, do not blindly follow these 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

       Investment Characteristics: What Fueled 2003 Performance?
    All of the top-performing strategies in 2003 turned in triple-digit returns with the small-cap, value-oriented Piotroski screen roaring to the top with a 142.3% gain for 2003. Even most of the weakest-performing strategies managed to accelerate with double-digit gains.

    Only the Murphy low-price-to-growth-flow approach hit the performance wall in 2003—losing a surprising 38.1%.

    Table 2.
    Stock Screen
    Winners and Losers

    Small-cap strategies typically performed better than large-cap strategies in 2003. Table 2 presents the characteristics of the top- and bottom-performing strategies for 2003 and cumulatively since 1998.

    All of the top-performing strategies for 2003 would be classified as small cap. The median market cap (share price times number of outstanding shares) of stocks passing the Piotroski screen is only $36 million, smaller than practical for most money managers, but perfectly sized for the aggressive individual investor.

    The Dogs of the Dow strategies are at the other end of the spectrum. These strategies look at Dow Jones industrial average stocks with the highest yield. The median market cap for these strategies is over $80 billion. While small-cap strategies did better than large-cap approaches, the Dow is up 20.4% in 2003, and neither Dogs of the Dow approach kept pace with their large-cap benchmark.

    The price-earnings ratio (price divided by trailing 12-month earnings per share) of the Piotroski screen is in line with the median for all the exchange-listed stocks in Stock Investor Pro. But at 1.0, the price-to-book value ratio (price divided by book value per share) is about half the norm.

    The multiples (price-earnings, price-to-book and price-to-sales ratios) of the Foolish Small Cap 8 approach are much higher than all the other approaches. This growth approach seeks profitable and rapidly growing small-cap companies with strong price momentum.

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

    The PEG ratio is computed by dividing the normalized price-earnings ratio (price divided by the estimated current year EPS) by the estimated EPS growth rate. 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 stocks.

    While no clear patterns emerge among the winning or losing strategies, many of the larger-cap and growth strategies sport higher PEG ratios.

    Relative Strength
    The portfolios of the winning strategies are filled with stocks that have already shown strong relative price strength.

    The relative strength index in the table is calculated against the performance of the S&P 500. Stocks with performance equal to the S&P 500 over the last 52 weeks have a relative strength index of zero. A relative strength rank of 7.0 indicates that a stock outperformed the S&P 500 by 7%. Negative numbers indicate underperformance relative to the index.

    The stocks making up the Foolish Small Cap 8 screen have a median relative strength of 255 indicating that the individual stocks currently passing the screen have already outperformed the S&P 500 by 255% over the last year. In contrast, the current portfolios of most of the bottom-performing strategies have underperformed the S&P over the last year.

    Market Cap
    The long-term winners tend to have portfolios filled with small and mid-cap companies. The stocks passing the growth-at-a-reasonable-price Zwieg approach have a median market cap of $2.192 billion. The Neff and Estimate Revisions Up 5% screens also have portfolios filled with mid-cap companies, but while the price-earnings ratio of the Neff portfolio is only 9.0, the price-earnings ratio for the current portfolio of the Estimate Revisions Up 5% screen is four times higher with a ratio of 39.0.

    Both Dogs of the Dow strategies also made the Total History bottom-performing list. Large-cap issues have underperformed small- and mid-cap strategies over the last six years. The large-cap S&P 500 is up 10.7% since the beginning of 1998, while the S&P MidCap 400 has gained 69.7% and the SmallCap 600 gained 47.0%.

    Many of the bottom-performing strategies are specialty and sector screens. The Estimate Revisions Up 5% screen made the list of long-term top performers while its counterparts—Estimate Revisions Down and Estimate Revisions Down 5%—made the list of weakest cumulative performing screens. Note that the strong performance for the upward revision screen and weak performance for the downward revision screens came after the initial market reaction to the estimate revision, which points to the persistent impact of an estimate revision.

    Winning Characteristics
    Overall, these are the common elements found in many of the winning stock selection strategies:

    • Reasonable, but not necessarily the best multiple (low price-earnings ratio, low price-to-sales ratio, low price-to-book ratio; high yield, etc.);
    • Emphasis on consistency of growth in earnings, sales, or dividends;
    • Strong financials;
    • Price momentum; and
    • Upward earnings revisions.

    John Bajkowski is AAII’s financial analysis vice president and editor of Computerized Investing.

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