O'Shaughnessy's
Screen versus Our Improved Screen
We modified O'Shaughnessy's
stock screen in an effort to make a great strategy even better.
We back-tested our modified
version starting in 2002 and found that it achieved an annualized
return of 29.6% when buying all 50 stocks from the
stock screen and holding
for six months. Note: holding fewer than 50 stocks resulted
in higher returns; more on this in our implementation
section.
In each 6-month period during
the testing, the Cornerstone Growth Stock Screen performed
better than the S&P 500. It also out-performed the S&P
500 in both up and down markets. Furthermore, we discovered
that returns were higher in our modified screen if only the
top ten stocks (ranked by relative price strength) were purchased.
In particular, stocks with the 4th,
5th, and 6th highest relative price strength were found
to continue to exhibit price momentum by achieving an
annualized return of 85.3% when the screen was followed
on a monthly basis. This figure includes both real-time trades
and back-tested data. It appears that the three stocks with
the highest relative price strength had already reached much
of their potential, and were therefore outperformed by the
rest of the stocks in the top 10 positions. We obviously don't
believe the stocks will continue an annualized return of 85.3%,
but they are a good place to start when selecting stocks from
the screen. You can go here
to view the stocks that make up the current screen.
Screening Criteria
(old)
The strategy searched a grouping of stocks that O'Shaughnessy
called his "All-Stocks Universe" (market caps in
excess of a deflated $150 million). He then sought stocks
with a low price-to-sales ratio with earnings higher than
the previous year. Then the 50 stocks with the highest 12-month
relative price strength were chosen. The reason he chose 50
was because that was the common portfolio minimum for institutional
money managers. Individual investors are better off buying
fewer stocks as we'll discuss in a moment.
Screening Criteria
(new)
Recent events have shown how easy it is for unethical companies
to manipulate earnings. Even "ethical" managers
are often tempted to boost earnings by any means possible
in order to inflate the value of stock options and management
bonuses. Therefore, instead of using earnings in our screening
criteria, we use metrics that are much more difficult for
management to manipulate. In addition, we want to ensure that
momentum hasn't recently waned, therefore we have added criteria
that screens out stocks that are losing momentum.
Next: Results
of Our Improved Stock Screen
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