Factor Categories of AAII Screening Strategies

• Value (V)
  The foundation of value investing is the notion that cheaply priced stocks outperform more expensive stocks in the long term. Value has several dimensions: the stock price as a multiple of company earnings, price as a multiple of book value and other such ratios. Comparing a company’s price-earnings (P/E) ratio to its forecasted or historical earnings growth is also used (PEG ratios). Academics and investors differ on which measure best represents a value company. The value factor has a long history in financial research starting in the 1930s when academics developed a methodology for identifying stocks trading less than their actual value. However, the best-known work on the value factor was carried out by Eugene Fama and Kenneth French in their 1992 paper, “The Cross-Section of Expected Stock Returns,” which concluded that a low price-to-book ratio was the most predictive definition of value.
  
  Screening strategies are tagged as “value” if they contain filters that look for stocks with low price multiples on either an absolute or relative basis; have price multiples that are low based on historical averages or sector/industry norms; or have price multiples that compare favorably to either historical or forecasted growth (PEG).
  
  
• Growth (G)
  The foundation of growth investing is the notion that stocks of companies exhibiting strong, consistent and prolonged growth outperform those of slower-growth companies. Growth has several dimensions, including year-over-year increases in sales and earnings, long(er)-term historical sales and earnings growth rates and analyst-forecasted long-term earnings growth.
  Stock screening methodologies are tagged as “growth” if they look for stocks with a history of earnings increases; look for minimum levels of growth in sales, earnings, cash flow, etc.; or have minimum projected earnings growth.
  
  
• Momentum (M)
  The momentum factor refers to the tendency of winning stocks to continue performing well in the near term (three to 12 months). Academics first identified the momentum premium in 1993, when Narasimhan Jegadeesh and Sheridan Titman demonstrated that the strategy of buying stocks that have done well and selling stocks that have done poorly generated significant positive returns over three- to 12-month holding periods.
  
  Stock screening strategies are tagged as “momentum” if they look for minimum levels of absolute or relative price strength or require the share price to be within a certain percentage of the 52-week high.
  
  
• Size (S)
  The size factor captures the tendency of small-cap stocks to outperform bigger companies over the long run. The market capitalization of a company is its current share price multiplied by the number of outstanding shares. University of Chicago Ph.D. Rolf Banz identified the size factor in U.S. stocks in 1981. The research on size took off after economists Eugene Fama and Kenneth French included it as a key component in their influential three-factor model.
  
  Stock screening approaches are tagged as “size” if they look for smaller companies, typically with market capitalizations below $2 billion, or relatively small levels of annual sales.
  
  
• Earnings Estimates (EE)
  Investing based on analyst estimates looks for revisions in the consensus estimates as well as earnings surprises (actual earnings deviating from the consensus estimate). Academic studies have shown that companies that have seen strong upward earnings revisions or have reported significant earnings surprises can see an impact on share prices for up to a year.
  
  Screening strategies are tagged as “earnings estimates” if they filter for the number of upward or downward revisions by analysts; the percentage change in the consensus estimate; and the percentage by which reported earnings exceeds or falls short of the consensus estimate (percentage surprise).
  
  
• Yield (Y)
  A yield (or high dividend yield) investment strategy gains exposure to companies that appear undervalued and have demonstrated safe, stable and increasing dividends. Dividend investing is as old as stocks themselves, playing a central role in the evolution of corporations over the centuries. Groundbreaking economists Benjamin Graham and David Dodd famously called dividend payouts “the prime purpose of a business corporation … A successful company is one that can pay dividends regularly and presumably increase the rate as time goes on.”
  
  Screening strategies are tagged as “yield” if they specifically look for dividend-paying stocks as well as minimum absolute dividend yields or stocks that are trading with yields above historical averages or sector/industry norms.
  
  
• Quality (Q)
  The quality factor is described in academic literature as capturing companies with durable business models and sustainable competitive advantages. This definition has been expanded to look at company profitability and growth and quality of management. The quality factor has helped explain the movement of stocks that have low leverage, stable earnings and high profitability.
  
  Screening methodologies that are tagged “quality” look for companies with records of consistent sales or earnings growth; strong returns on equity on either an absolute basis or relative to historical averages or sector/industry norms; and reasonable levels of debt.
  
  
• Industry/Sector (I)
  Sector and industry rotation is an investment strategy involving the movement of money from one industry or sector to another in an attempt to beat the market.
  Screening strategies tagged as “industry/sector” explicitly isolate specific sectors or industries.
  
  
• Other (O)
  The miscellaneous category captures specialty screening strategies that do not fall into one of the other factor categories.