How the Strategies Have Fared: A Mid-Year Performance Review

    by John Bajkowski

    How The Strategies Have Fared: A Mid Year Performance Review Splash image

    A second quarter stock market surge overtook a weak market start in 2003, resulting in some of the broadest stock gains investors have seen in years. Virtually all market segments participated in the market rally, leading to double-digit gains for most. All of the fully invested screening strategies tracked on showed positive gains for the first half of 2003, with smaller-cap strategies typically showing better performance than strategies investing in larger issues.

    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 section of We have been developing, testing, and refining a wide range of screening strategies over the last six 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 of investment styles, from those that are value-based to those that focus primarily on growth in earnings or price.

    Table 1 presents the price gains for the various investment strategies that are tracked, along with index performance data.

    Value Leaders

    The price change columns report the gains or losses for each strategy by period with the cumulative gain presented in the total price change column.

    The Fundamental Rule of Thumb screen led the value strategies for the first half of 2003 with its 55.2% gain. This screen combines price-earnings ratio (price divided by earnings per share), dividend yield (dividends per share divided by price), earnings retention levels (percentage of earnings not paid out through dividends), and return on equity (net income divided by owner’s equity). All of these elements are well-known and well-used by value investors. The screen tends to turn up smaller-cap value stocks, which have led the market this year.

    The John Neff approach continues to be the long-term value strategy leader with its 339.5% cumulative gain over the last five and a half years. This value screen looks for stocks trading at a significant discount to the market—as measured by the ratio of price-earnings to expected earnings growth (PEG ratio)—that are exhibiting strong, but not excessive growth in sales and earnings. The screen typically favors mid- and small-cap stocks from a wide range of industries.

    Growth & Value

    The Value on the Move screen, which also uses the ratio of the 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 seem to be concentrated in the financial, construction, and retail sectors.

    The Martin Zweig strategy is the long-term performance leader of the growth and value strategies with its 572.5% cumulative price gain over the last five and a half years. 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 financial and health care stocks.

    Growth Leaders

    The Foolish Small Cap 8 strategy shot past all of the growth strategies in the first half of 2003 with its 65.1% gain after two years of negative returns. The Foolish 8 small-cap investing system looks for profitable and rapidly growing small companies with strong price momentum. Health care and technology stocks currently dominate the companies passing the screen.

    The long-term performance leader within the growth strategy continues to be the William O’Neil CAN SLIM approach. The strategy has generated a 503% gain over the past five and a half years without a single down year. The screen looks for companies with rapidly growing earnings that are hitting new highs and exhibiting strong price acceleration. Stocks currently turned up by the approach tend to be in the financial and technology sectors.

    Risk & Turnover

    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 five years 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 Monthly Holdings columns provide data on portfolio holdings over time—the total number of stocks that were in each portfolio over the last five and a half years and the average holdover percentage from month to month as an indication of turnover. For example, the Graham Enterprising Investor screen has averaged only six passing companies per month.

    The Percent Holdover column gives an indication of the turnover for a given strategy. Every month these portfolios are rebalanced and only those companies passing the screen for a given month are held. The higher the percentage holdover, the greater the chance that a company will pass a screen month after month.


    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

       Screening Methodology
    Each month, over 60 separate screens are performed using AAII’s Stock Investor Pro software and the current companies passing each individual screen are reported. Stock Investor 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.

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

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