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Drum roll please.

The 2014 Q1 results for the value screens are in.

Of the 15 pre-defined screens that I have up for free, 9 are beating the market, which is a 60% win rate at the moment.

But one quarter doesn’t tell you anything. Just a vanity stat I threw out there.

Let me show you how the value screeners did in 2013 first.

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2013 Performance at the End of Each Quarter

2013 is a tough year to beat, but so far the first quarter of 2014 results are looking good.

2014 Q1 Value Screener Performance Results

2014 Q1 Results

It’s much too early to conclude what type of stocks are doing well this year, but so far, it looks like it’s the exact opposite of 2013. Here’s an image that came up on my Twitter feed.

2014 vs 2013 Sector Performance | Source

To see how I created each screen and what it means, go check out the screener page. There are links to backtests I performed as well as historical performance charts going back to 1999.

The Most Common Stock Screening Mistake

When I go about creating screens, I base them on a “theme” or hypothesis.

The most common and incorrect way to screen for stocks is to simply use something like the Google Finance screener to look for low P/E or high ROE stocks.

It’s wrong because that’s what everybody else is doing. Any value investor who uses a stock screen has at least looked up stocks using the criteria below:

  • Low P/B
  • Low P/E
  • High ROE
  • High ROIC
  • Low debt to equity

Does this type of screen sound familiar?

If the objective is to outperform the market, you need to search differently from everyone else.

Howard Marks just released another memo titled “Dare to be Great II." He talks about how you have to be unconventional to get above average results. Read the memo. I highly recommend it.

And here’s a screen that is definitely 100% different.

Screen of the Quarter

The big idea behind this screen was to look for companies increasing their tangible working capital.

NNWC (Net Net Working Capital) is a variation of NCAV (Net Current Asset Value).

NNWC = Cash
+ Short Term Marketable Investments
+ (Accounts Receivable x 75%)
+ (Inventory x 50%)
– Total Liabilities

As you can see from the formula, it’s very conservative as it’s only counting tangible current assets and even discounting items such as receivables and inventory.

If a company is able to grow its NNWC figure, it’s a good indication of improving working capital and asset strength. I’m not worried about whether the NNWC is positive to start with because the idea isn’t to limit stocks with a positive NNWC.

I want to find stocks improving their operations. So if a business had a negative NNWC last year but is now positive this year, that is a fantastic sign that the market probably won’t detect until later on.

Based on what I’ve written, here are 10 stocks I’ve pulled from the screen with additional data provided by the Old School Value Stock Valuation Calculator.

Top 10 Stocks from the NNWC Increasing Screen

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Top 10 Stocks from the NNWC Increasing Screen

Stock #1: Fuel Systems Solutions (NASDAQ:FSYS)

Currently trading at its NCAV value, but has increased NNWC from $86.3M the last fiscal year to $97.7M in the latest fiscal year.

Here’s the net net details of what makes up NNWC.

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Fuel Systems Solutions Net Net Worksheet | Source: OSV Analyzer

Surprisingly, Fuel Systems Solutions' assets look good. For a stock trading near its NCAV, it has a lot of cash and equivalents, and is not overly stacked up with finished goods, which is an issue with a lot of NCAV stocks.

FCF is also positive, which is another surprise. It’s been positive 7 out of the last 10 years.

I’ll have to look into the stock further.

Stock #2: Imation (NYSE:IMN)

Here’s a perennial net net.

Imation has been rolling around the value dumping ground for years. It’s been a few years since I checked up on it, but at least its business is no longer centered around DVD storage.

Its NNWC has jumped dramatically from -$9.3M to $28.6M.

Is a turnaround in the works?

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Fuel Systems Solutions Net Net Worksheet | Source: OSV Analyzer

Stock #3: Pericom Semiconductor Corp. (NASDAQ:PSEM)

In terms of quality, PSEM is improving.

A quick way to judge is by looking at the historical Piotroski scores.

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Historical Piotroski Scores

Although value has been destroyed, which I’m assuming based on the years of negative ROE and ROIC, NNWC has increased. Not by much, but an improvement is an improvement.

Enterprise Value is less than market cap, which means that the company is flush with cash.

Here are some additional numbers.

PSEM Valuation and Performance Ratios

What do you think about the NNWC Increasing Stock Strategy?

When you look at NNWC increasing stocks, don’t bother too much on how profitable it is. The key is to find companies where you are seeing improvements. Combine that with plenty of cash and other margin of safety requirements, and you may find a home run.

And so far, the NNWC Increasing Value Screen is leading the way.

What do you think about this value strategy?

Source: My 2014 Q1 Value Stock Screener Performances