I have searched for a screening method, which has proven to perform much better than the main indexes of the U.S. stock markets. The following screen, which is provided by Portfolio123, draws inspiration from the work of the well-known investor, Joseph Piotroski. Mr. Piotroski is an American professor who specializes in accounting and financial reporting issues, and an active value-based investor.
The screen's formula requires all stocks to comply with all following demands:
- Stock is included in Russell 3000 index.
- Earnings per Share trailing twelve months above zero.
- Operating Income above zero.
- Operating cash flow per share above zero.
- Gross margin improved in the past year.
- Operating cash flow per share above EPS.
- Total debt to assets ratio down in the past year.
- Current ratio improved in the past year.
- Asset turnover improved in the past year.
- Return on assets improved in the past year.
- Number of outstanding shares did not rise in the past year.
- The 10 stocks with the lowest price-to-book-value ratio among all the stocks that complied with the first eleven 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 June 25, 2013, before the market open, I discovered the following ten stocks: Benchmark Electronics Inc (NYSE:BHE), Brocade Communications Systems Inc (NASDAQ:BRCD), Central Garden & Pet Co (NASDAQ:CENTA), Ingles Markets Inc (NASDAQ:IMKTA), Scripps (E.W.) Co. (NYSE:SSP), Helmerich & Payne Inc. (NYSE:HP), Consolidated Graphics Inc. (NYSE:CGX), Weyco Group Inc (NASDAQ:WEYS), J.M. Smucker Co (NYSE:SJM) and Foot Locker Inc. (NYSE:FL).
The table below presents the ten companies, their last price, their market cap and their industry.
The table below presents the earnings per share for the trailing twelve months (NYSE:TTM), the operating cash flow per share, the gross margin, the gross margin a year before, the debt to assets ratio for the last quarter and for the year before for the ten companies.
The table below presents the current ratio, the current ratio a year before, the asset turnover, the asset turnover a year before, the return on assets and the return on assets a year before for the ten companies.
In order to find out how such a screening formula would have performed during the last year, last 5 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 benchmarks (S&P 500 and Russell 3000), 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
Just a matter of curiosity, the table below presents the ten companies originated by the screen formula one year before, on June 23, 2012.
Five years back-test
The table below presents the ten companies originated by the screen formula five years before, on June 24, 2008.
Fourteen years back-test
The table below presents the ten companies originated by the screen formula fourteen years before, on January 02, 1999.
The growth stock screen has given much better returns during the last year, the last five years and the last 14 years than the S&P 500 and Russell 3000 benchmarks. The Sharpe ratio, which measures the ratio of reward to risk, was also much better in the five and fourteen year's tests. One year return of the screen was exceptionally high at 44.61% while the return of the S&P 500 index during the same period was at 19.0%, and the return of the Russell 3000 was at 19.95%. The difference between the growth stocks screen to the S&P 500 and Russell 3000 benchmarks was much more noticeable in the 14 years back-test. The 14-year average annual return of the screen was at 16.20% while the average annual return of the S&P 500 index during the same period was only 1.72%, and the return of the Russell 3000 was at 2.39%. Although this screening system has given superior results, and I am using it for my own investments, I recommend readers use this list of stocks as a basis for further research.
Disclosure: I am long BHE, BRCD, CENTA, IMKTA, SSP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.