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Arie Goren, Portfolio123 (475 clicks)
Long only, value, research analyst, dividend investing
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I tried to create a growth stock portfolio that can outperform the market by a big margin. The following screen shows such promise. I have searched for companies that are included in the S&P 500 index that have had strong earnings and sales growth and have strong growth prospects. Those stocks also would have to show low debt.

The screen's method requires all stocks to comply with all following demands:

  1. The average annual EPS growth for the past five years is greater than 10%.
  2. The average annual sales growth for the past five years is greater than 10%.
  3. The average annual EPS growth for the past five years is greater than the sales growth for the past five years.
  4. The average annual earnings growth estimates for the next five years is greater than 10%.
  5. Total debt to equity ratio is less than 0.50.
  6. The current ratio is greater than the current ratio one year before.
  7. The ten stocks with the highest sales growth among all the stocks that complied with the first six demands.

I used the Portfolio123's powerful screener to perform the search and to run back-tests. Nonetheless, the screening method should only serve as a basis for further research. All the data for this article were taken from Portfolio123.

After running this screen on May 19, 2013, I discovered the following 10 stocks: Alexion Pharmaceuticals Inc (ALXN), Regeneron Pharmaceuticals Inc (REGN), Apple Inc(AAPL), TripAdvisor Inc (TRIP), Intuitive Surgical Inc (ISRG), Priceline.Com Inc (PCLN), Coach Inc. (COH), Biogen Idec Inc (BIIB), IntercontinentalExchange Inc (ICE) and Dollar Tree Inc (DLTR).

The table below presents the 10 companies, their last price, their market cap and their industry.

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The table below presents the average annual EPS growth for the past five years, the average annual sales growth for the past five years, the average annual EPS growth estimates for the next five years, the debt-to-equity ratio and the current ratio of the 10 companies.

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Back-testing

In order to find out how such a screening formula would have performed during the last year, last five years and last 14 years, I ran the back-tests, which are available by the Portfolio123's screener.

The back-test takes into account running the screen every four weeks and replacing the stocks that no longer comply with the screening requirement with other stocks that comply with the requirement. The theoretical return is calculated in comparison to the benchmark (S&P 500), considering 0.25% slippage for each trade and 1.5% annual carry cost (broker cost). The back-tests results are shown in the charts and the tables below.

One-year back-test

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Just a matter of curiosity, the table below presents the 10 companies originated by the screen formula one year before, on May 19, 2012.

Five-years back-test

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The table below presents the 10 companies originated by the screen formula five years before, on May 17, 2008.

14-years back-test

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The table below presents the 10 companies originated by the screen formula 14 years before, on February 27, 1999.

Summary

The growth stocks screen has given much better returns during the last year, the last five years and the last 14 years than the S&P 500 benchmark. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in the last five and 14 years and was a bit lower in the last year. One-year return of the screen was at 32.70% while the return of the S&P 500 index during the same period was at 27.20%. The difference between the growth stocks screen to the S&P 500 benchmark was much more noticeable in the 14-years back-test. The 14-year average annual return of the screen was at 10.32% while the average annual return of the S&P 500 index during the same period was only 2.14%. Although this screening system has given superior results, I recommend readers use this list of stocks as a basis for further research.

Source: S&P 500 Growth Stocks Portfolio That Can Outperform The Market By A Big Margin