How do I re-create the OShaughnessy Growth Market Leaders screen
The goal of stock analysis—fundamental and technical—is to attempt to predict future movements in individual stocks as well as the overall market. In his book, “Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years,” James O’Shaughnessy argues that the best way for investors to predict where the market is headed is to look to see where it has been. In other words, in O’Shaughnessy’s opinion, you can use the past to predict the future.
Based on his research of stock market data going as far back as the 1790s, O’Shaughnessy found that equity markets tend to move in roughly 20-year cycles, and he developed an investment approach for individual investors that attempts to take full advantage of current market trends.
In this book, O’Shaughnessy introduced four new screening methodoloies: Growth Market Leaders, a large-cap screen that combines elements of both growth and value; Small-Cap Growth and Value, which looks for cheap stocks on the rebound; Tiny Titans, an aggressive screen that searches for undervalued micro-cap stocks with upward price momentum; and All-Cap Value With a Growth Twist, a combination of the Growth Market Leaders and Small-Cap Growth and Value approaches.
All but the Growth Market Leaders screeen are built into Stock Investor Pro. The Growth Market Leaders screen make use of average data from a sub-set of the Stock Investor database. For this reason it cannot be programmed into the program. However, you can recreate this screen following these steps.
O’Shaughnessy’s Growth Market Leaders screen resembles his Cornerstone Growth and Cornerstone Value screens, which are also built into Stock Investor, and combines elements of value, financial strength, and growth.
The companies that eventually pass the Growth Market Leaders screen are drawn from O’Shaughnessy’s “Market Leaders” universe of stocks, which he introduced in his earlier book “What Works on Wall Street.”
Here is the screen for the Market Leaders universe:
For the Growth Market Leaders approach, O’Shaughnessy looks for companies with price-to-sales ratios that are less than the average of the Market Leaders universe. This number will change over time and can be found using Stock Investor following these steps:
1. Create and run the Market Leaders screen
2. Run a Statistical Summary report for the active notebook:
3. Select a View that contains the price-to-sales field; the predefined *Multiples View in Stock Investor contains the price-to-sales ratio:
4. On the Statistical Summary report, find the average price-to-sales ratio for the Market Leaders universe:
The average price-to-sales ratio for the Market Leaders universe is 1.13 (as of 1/30/2009).
5. Enter the average price-to-sales value of 1.13 for the Market Leaders universe in the Screen Editor for the Growth Market Leaders screen:
Lastly, O’Shaughnessy believes that proper diversification is a key factor in maintaining a profitable portfolio. He therefore recommends holding at least 25 stocks in a micro-, small- or mid-cap portfolio, and at least 10 stocks in a large-cap portfolio.
To arrive at the final list of 10 stocks passing the Growth Market Leaders screen, adjust the value for 52-week relative strength value in the Screen Editor until only 10 companies pass. To do this, enter in a value and then click the "How Many" button in the Screen Editor to see how many companies pass. If more than 10 companies pass, you will need to adjust the relative strength value higher or vice versa. As of January 30, 2009, a 52-week relative strength value of 45 left us with 10 passing companies for the O'Shaughnessy Growth Market Leaders methodology: