Seeking Alpha
Independent research, long/short equity, dividend investing, ETF investing
Profile| Send Message|
( followers)  
Yesterday I wrote an article which backtested a basic value strategy. To summarize, I backtested a value strategy based on the following criteria starting in 1/1/2002 which rebalanced every 4 weeks and assumed .5% slippage (a note about slippage using StockScreen123 - stocks that pass the screen are equally weighted at each rebalance. Slippage is only calculated when selling out of a stocks that no longer passes and for new stocks. The slippage to bring stocks that remain from one period to the other are not taken into account):
  • Price to Book < 1
  • Return on Equity Last 12 Months > 0
  • Return on Assets Last 12 Months > 0
  • Total Debt to Equity < 40%
  • Current Ratio > 3
  • Price to Free Cash Flow Trailing 12 Months < 15
  • Projected Earnings Next Fiscal Year > 0
  • No OTC Stocks
As I noted yesterday, one significant drawback of the screen is that while the average number of positions is 10 stocks, during 2008 there were periods where the number of qualifying companies was as high as 77. In addition, turnover can create additional tax burdens and trading costs could significantly reduce returns.

One strategy to reduce the potential number of trades/commissions is to limit the number of potential stocks one holds. When running the screen every 4 weeks, one could pick the top 5 stocks based on a predefined set of criteria. I ran the identical screen as the one above but ranked 5 stocks based on theeach stock's returns over the preceding 26 weeks. If one ran the above screen and purchased the 5 stocks with the lowest performance over the preceding 26 weeks, the results with .5% slippage are below:
  • $100 invested in the strategy turned to $1182.70, versus $98.20 in the S&P 500 (excluding dividends)
  • Average turnover was still high at 45%
The strategy suffered signifcant drawdowns in 2008. However, had the strategy been implemented at the beginning of 2008 it would have still been well ahead of the market as of yesterday's close:

I also ran the identical screen as the one above but ranked 5 stocks based on the stock's returns over the preceding 26 weeks. If one ran the above screen and purchased the 5 stocks with the highest performance over the preceding 26 weeks, the results with .5% slippage are below:
  • $100 invested in the strategy turned to $421.1, versus $98.20 in the S&P 500 (excluding dividends)
  • Average turnover was still high at 41%
Still good returns, but not as impressive as the 'contrarian' strategy of purchasing the worst performers based on 26 week returns. Admittedly, I expected the opposite - that the highest momentum stocks would outperform the lowest.
An investment at the start of 2008, near the beginning of the worst performance period for the strategy, would be up 3.8% today:


I acknowledge the backtest is not a thorough academic study and is not a large enough sampling period to draw major conclusions. However, it is a thought-provoking exercise for value-oriented investors. The screen criteria provides a small list of stocks which, if invested in, has provided excess returns over the past 7 years when one ignores tax implications, any additional slippage beyond the .5% assumption, and commissions.

For those interested in the current stocks passing my value criteria, please see below:

12/28/2009












Ticker Name Free Trend Analysis Start End Ret (%) MktCap
SPAR Spartan Motors, Inc. Here 5.12 5.34 4.3 167.69
SIGM Sigma Designs, Inc. Here 10.87 11.08 1.93 290.69
NWPX Northwest Pipe Company Here 25.21 28.66 13.69 232.85
HOTT Hot Topic, Inc. Here 5.66 6.41 13.25 254.7
ACET Aceto Corporation Here 5.07 5.27 3.94 125.63
AOB American Oriental Bioengineer Here 4.28 4.37 2.1 333.65
MATK Martek Biosciences Corp. Here 18.42 19.09 3.64 606.28
DIVX DivX, Inc. Here 5.24 5.23 -0.19 171.42
CRDN Ceradyne, Inc. Here 18.38 18.6 1.2 470.98
LAKE Lakeland Industries, Inc. Here 7.95 8 0.63 43.5
INET Internet Brands, Inc. Here 7.69 7.8 1.43 345.94
OPTV OpenTV Corp. Here 1.42 1.38 -2.82 196.1
ALG Alamo Group, Inc. Here 16.08 15.87 -1.28 183.13
QLTI QLT Inc. (NYSE:USA) Here 4.74 5.09 7.38 259.5

Author's Disclosure: No Positions

Source: Value Investing: Strategies for Improving Your Returns