James O'Shaughnessy investigated several stock picking screens in his book What Works on Wall Street. One of the screens he devised invests in reasonably priced high momentum stocks. This is how he does it:
Ben Graham said anyone paying more than 20 times earnings for a stock should prepare to lose money in the long run. What happens if we remove high price-to-earnings (PE) ratio stocks from the All Stocks universe and then buy the 50 biggest winners? Instead of just buying the top 50 relative strength stocks, let’s also require that stocks have PE ratios between zero and 20. Thus, we start with the All Stocks universe and screen out stocks with negative PE ratios or PE ratios above 20, then buy those 50 stocks having the best one-year price appreciation.
In 52 years of back testing this strategy, it returned an average annual compound return of 17.9% vs. 13% for the entire market. This strategy beats the market by nearly 5 percentage points and its downside risk is also 10% lower than the market. Of course, these are average returns and annual performance of the strategy may significantly deviate from these levels. Insider Monkey, your source for free insider trading data, obtained the data from Google Finance and ranked these stocks based on their 1-year returns. Here are 20 stocks that satisfy O’Shaughnessy’s screens:
1. IDT Corporation (IDT): IDT returned 409% during the past 12 months and topped our list. The stock has a relatively low PE ratio of 14 and a dividend yield of 3.5%. IDT’s market cap is $575 Million.
2. Kronos Worldwide Inc (KRO): Kronos, a producer of titanium dioxide pigments, returned 267% during the past 12 months. The stock’s PE ratio is slightly above 20, so a small decline in prices should be enough to qualify this company. KRO has a dividend yield of 1.9% and a market cap of $3.1 Billion.
3. Magic Software Enterprises Ltd (MGIC): This software company returned 194% during the past 12 months. MGIC has a PE ratio of 19 and a dividend yield of 8.2%. It is a very small company with a $172 Million market cap.
4. Provident Financial Holdings (PROV): This community banking company returned 148% during the past 12 months. PROV has a PE ratio of 7.7 and a dividend yield of 0.5%. Its market cap is below $100 Million.
5. RPC Inc (RES): This oil and gas services company returned 128% during the past 12 months. RES has a market cap of nearly $3 Billion and a PE ratio of 20. Despite its high PE, it yields 1.4%.
6. Sinclair Broadcast Group (SBGI): This television broadcast company managed to return 127% during the past year, yet its PE ratio is still a relatively low 12. SBGI yields 3.8% and has market cap of $940 Million.
7. Escalade Inc (ESCA): This sporting goods company returned 126%, yet it can still be considered a value stock with a price-to-book ratio of 0.84 and price-to-sales ratio of 0.61. The stock’s PE ratio is 15 and it yields 1.7%.
8. Westlake Chemical Corp (WLK): Westlake operates in the specialty chemicals industry. It returned 110% during the past 12 months, but it’s PE ratio is still slightly below 15.
9. Federal Agriculture Mortgage Corp (AGM): AGM provides agricultural real estate mortgage loans in the secondary market. The stock increased 105% during the past 12 months. It has a PE ratio of 12 and yields 1.1%.
10. W&T Offshore Inc (WTI): WTI is an offshore driller that operates in the Gulf of Mexico. Surprisingly the stock returned 101% during the past 12 months and currently has a PE ratio of 12.
11. Buckeye Technologies Inc (BKI): BKI returned 85% during the past 12 months. Its PE ratio is 8.9 and has a 0.8% dividend yield. This paper products company was one of the 7 stocks insiders were buying like crazy back in December. The stock gained 19% since we reported significant insider purchases.
12. Herbalife (HLF): This $4.6 Billion nutritional supplements company returned 85% during the past 12 months. It has a PE ratio of 16.6 and a small dividend of 1.3%.
13. TAL International (TAL): This Purchase, NY company has a market cap of $1.1 Billion, thanks to its 83% return during the past 12 months. The stock has a pretty high PE ratio of 19 and an extremely high dividend yield of 5.4%.
14. Dillard’s Inc (DDS): DDS is an apparel and home furnishing retailer. The increase in consumer spending benefited the stock over the past 12 months, returning 82%. DDS has a PE ratio of 15.
15. Destination Maternity Corp (DEST): Destination Maternity managed to return 79% during the past 12 months. DEST has a PE ratio slightly below 14 and a decent dividend yield of 3.1%.
16. iGate Corporation (IGTE): IGTE returned 79% during the past 12 months and has a PE ratio of 19. The quarterly revenues at this IT services company grew by 54% during the past year and the stock seems to be a bargain according to analysts who expect its high growth to continue.
17. Winmark (WINA): Winmark returned 76% during the past 12 months. The stock has a PE ratio of 19 and a dividend yield of 0.2%. We reported significant insider purchases by Winmark insiders on January 9th. The stock was trading around $33 back then. Winmark gained 13% during the past 2 months, beating the market by more than 12 percentage points.
18. Hitachi (HIT): Hitachi was trading above $65 just last week and yesterday it closed below $50. Nevertheless the stock returned 74% during the past 12 months and has a PE ratio of 8.7. It’s a bit of a risky stock, considering the situation in Japan right now.
19. Cimarex Energy (XEC): This $9 Billion company has a PE ratio of 17 and returned 71% during the past 12 months. The stock has a forward PE ratio of 13 and a PEG ratio of 0.64. This implies that analysts expect this company to grow at a rate of 18% per year during the next 5 years.
20. National Oilwell Varco (NOV): NOV returned 69% during the past 12 months. It has a PE ratio of 19 and a dividend yield of 0.6%. This $31.5 Billion company is one of the oil stocks T. Boone Pickens is extremely bullish about.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.