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This screen implements the criteria laid out by Kenneth Fisher in his 1984 Dow Jones book, "Super Stocks". The main criteria used by Fisher was the price-to-sales ratio (PSR). Fisher argued that stocks with PSRs below 1.5 are good value while the real winners are those with PSR values under 0.75. The exception to this was “smokestack” industries which don’t generate a lot of excitement, for which the PSR target should be between 0.4 and 0.8. The other criteria he highlighted were: Profit margins - He wanted three-year average net margins to be at least 5% The debt/equity ratio - This should be no greater than 40 percent, and is not applied to financial firms) Earnings growth - The inflation-adjusted long-term EPS growth rate should be at least 15% per year). An optional criterion (to be used in the technology and medical industries) was: Price to Research Ratio - Less than 5% was the best case, and those between 5 and 10% were still indicative of bargains. Less than 15 percent was borderline. more »
A hard-core contrarian value screen, albeit one using the ‘total return ratio’ in order to combine value metrics with growth. Although he didn’t like the term, Neff was essentially a contrarian investor buying good companies with moderate growth and high dividends while out of favour, and selling them once they rose to fair value. He looked for both value and growth or rather "good companies, in good industries, at low price-to-earnings prices". To identify these, his approach adds the expected future growth rate to the dividend yield, and divided by the PE ratio to give what he termed the ‘terminal relationship’ or, more colloquially, ‘what you pay for what you get’. more »
This is a short-selling strategy based on Professor Beneish's M-Score - this is a mathematical model that uses eight financial ratios from the company's financial statements to assess the degree to which the earnings may have been manipulated. It is similar to the Altman Z-Score, but it is focused on detecting earnings manipulation rather than bankruptcy. The research suggests that a score less negative than -1.78 indicates a strong likelihood of a firm being a manipulator. Here is the link to the original Detection of Earnings Manipulation paper as well as the subsequent paper - The Relation between Accruals and Earnings Manipulation. The screen below highlights companies that have had a M-score above the threshold for two years in a row in order to reduce the likelihood that a given year's result is coincidental or a rogue data input error. more »
James Montier (former Soc Gen global equity strategist) aimed to create a simple scoring system that would highlight companies that may be 'cooking the books'. The C-Score was the result. It measures six inputs including the divergence between net income and cash-flow, increasing days sales outstanding, increasing days sales of inventory, increasing current assets to revenues, declining depreciation relative to PPE and high total asset growth. Montier found that companies with high C-Scores under performed the market by 8% per annum, generating a mere 1.8% return between 1993 and 2007. He recommended using it in tandem with a high valuation measure. A C Score = 5 used in tandem with a Price/Sales Ratio > 2 generated a negative absolute return of 4% p.a. in the US. For a full review of the C Score please click here. more »
This is a three point short selling screen based on the approach outlined by James Montier in 2008 to identify potential candidates in weak markets. 1. High Valuation (Price to Sales Ratio > 4) - Calling the Price to Sales ratio 'insane' as a valuation measure due to its lack of focus on profitability, Montier first screened for companies trading at a multiple of at least 4 times sales. 2. Weak Fundamentals (F Score < 4) - With the valuation side covered, he then qualified this list by screening for the financially weak companies having a Piotroski F Score of 3 or less. 3. Poor Capital Discipline (Asset Growth > 10%) - But unsatisfied with only focusing on high valuation and weak fundamentals, Montier also showed that company executives were often wasteful capital allocators; research showing that companies with low asset growth rates highly outperform companies with high asset growth rates by 13% annually. more »
This is a low Price to Book based on the writings of David Dreman. He champions a contrarian investment approach based on interpreting market psychology and using value measures to pick stocks that are out of favour with the market. Dreman invests in out-of-favour stocks, often in out-of-favour industries, that he identifies using relatively straightforward metric criteria. "I buy stocks when they are battered. I am strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favor stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time." Dreman warns that the Price to Book strategy in particular may lead to investing in loss-making stocks, at which one needs to be especially careful, and double-checking a company's financial strength is especially important. more »
