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James O’Shaughnessy is the founder of O’Shaughnessy Asset Management. He has written several books that provide quantitative analysis of stock market performance. In his book named What Works on Wall Street, he combined a variety of value and momentum strategies. One of the screens he designed first picks stocks with P/E ratios lower than 20, and then purchases those with the highest price appreciation in the last 52 weeks. The strategy returned an average annual compound return of 17.9%, versus 13% for the S&P 500 index in a 52-year back-testing. The downside risk of the strategy is about 10% less than that of all large cap stocks.

Below we compiled a list of 30 stocks that satisfy this screen.

Company

Ticker

P/E

Performance (Year)

China Mass Media Corp.

CMM

1.57

460.44%

Majesco Entertainment Co.

COOL

12.74

261.73%

Meritor, Inc.

MTOR

8.85

146.06%

Blue Dolphin Energy Company

OTCQX:BDCO

7.42

144.02%

Sturm, Ruger & Co. Inc.

RGR

19.23

138.31%

Patrick Industries Inc.

PATK

7.81

129.38%

Richmont Mines Inc.

RIC

16.62

128.94%

Analysts International Corp.

ANLY

10.17

127.27%

Coffee Holding Co.Inc.

JVA

15.93

122.34%

SMF Energy Corporation

FUEL

13.35

114.69%

Cyanotech Corp.

CYAN

16.92

112.22%

Elan Corporation, plc

ELN

12.54

111.62%

Spectrum Pharmaceuticals, Inc.

SPPI

18.74

110.06%

Jazz Pharmaceuticals, Inc.

JAZZ

16.99

109.08%

Seven Arts Entertainment, Inc.

OTCQB:SAPX

0.79

100.00%

HealthSpring Inc.

HS

13.63

96.72%

Mitcham Industries Inc.

MIND

16.51

96.21%

Akorn, Inc.

AKRX

18.78

92.03%

Bassett Furniture Industries Inc.

BSET

1.61

84.83%

Pinnacle Data Systems Inc.

PNS

11.33

83.08%

Datalink Corp.

DTLK

13.03

82.44%

Terra Nitrogen Company, L.P.

TNH

12.75

81.33%

Micronetics Inc.

NOIZ

16.63

78.12%

Clearfield, Inc.

CLFD

14.94

77.04%

Crawford & Company

CRD.B

5.81

76.92%

TGC Industries Inc.

TGE

17.05

76.79%

WellCare Health Plans, Inc.

WCG

11.25

74.19%

DUSA Pharmaceuticals Inc.

DUSA

15.7

73.77%

Newpark Resources Inc.

NR

14.38

70.45%

Atlas Pipeline Partners LP

APL

7.69

70.16%

Most of these 30 stocks are small cap stocks. Only seven of them – ELN, JAZZ, HS, AKRX, TNH, WCG, and APL – have market cap of over $1 billion. The stock with the largest market capitalization is Elan Corporation, a neuroscience-based biotechnology company. It has a market cap of $7.8B and a P/E ratio of 12.54. During the past 52 weeks, ELN returned 111.62%. During the third quarter, Ken Griffin’s Citadel Investment Group boosted its stakes in ELN by 72%. As of September 30, the fund had $23 million invested in ELN.

HealthSpring Inc also has a market cap of over $1 billion. The market capitalization of HS is 3.7B and the stock has a P/E ratio of 13.63. It returned 96.1% over the past 52 weeks. There are 21 hedge funds with HS positions in their portfolios at the end of the third quarter. Among them, Andreas Halvorsen’s Viking Global had the largest HS position. The fund reported to own $112 million worth of HS shares at the end of September.

Another large-cap stock on the list above is Terra Nitrogen Company LP (NYSE:TNH), which has a market cap of $3.3B and a P/E ratio of 12.75. The company is a producer of nitrogen fertilizer products. Over the past 52 weeks, TNH returned 81.33%. Jim Simons’ Renaissance Technologies disclosed owning $9 million worth of TNH shares at the end of the third quarter.

Back-testing indicates that investors may be able to outperform the market by constructing a portfolio of the above 30 stocks. Additionally, purchasing all of these 30 stocks should provide some diversification for investors. We encourage investors to do some in-depth research on these stocks' suitability for their own portfolios.

Source: 30 Stocks Expected To Beat The S&P By 5 Points