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Arie Goren
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Arie Goren has been, for many years, a global analyst for “Clal Finance Ltd.”, one of the biggest Israeli investment companies. He has many years of experience in the American Equity Market and in the Global Commodity Market. Goren has conducted much research on investment in equities and... More
  • My Growth Stocks Portfolio That Can Outperform The Market 2 comments
    Jun 5, 2013 8:11 AM | about stocks: AEY, BAMM, BHE, BRCD, CENTA, GASS, IEC, IMKTA, LPL, MPAC

    Usually, my investment strategy is based on buying a stock only after studying the company and analyzing the future prospects of the company's business, but recently I have started to invest also in groups of stocks that I have discovered through screening and back-testing. After running many stocks screens, I have found two screens that have shown exceptionally returns after running back-tests during the last year, last 5 years and last 14 years. The first portfolio is based on dividend stocks while the second portfolio is based on growth stocks. Although the past guarantees nothing, it does provide insight into how these screens have performed under various economic conditions over varying time frames.

    I described the first portfolio in my article My Good-Yielding Stocks Portfolio. In this article, I will describe the growth portfolio.

    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:

    1. Stock is not traded over-the-counter.
    2. Earnings per Share trailing twelve months above zero.
    3. Operating Income above zero.
    4. Operating cash flow per share above zero.
    5. Gross margin improved in the past year.
    6. Operating cash flow per share above EPS.
    7. Total debt to assets ratio down in the past year.
    8. Current ratio improved in the past year.
    9. Asset turnover improved in the past year.
    10. Return on assets improved in the past year.
    11. Number of outstanding shares did not rise in the past year.
    12. The 10 stocks with the highest gross margin among all the stocks that complied with the first eleven demands.

    After running this screen on June 03, 2013, before the market open, I discovered the following ten stocks: Books-A-Million Inc (BAMM), StealthGas Inc (GASS), ADDvantage Technologies Group Inc (AEY), Benchmark Electronics Inc (BHE), IEC Electronics Corp (IEC), MOD PAC CORP. (MPAC), Central Garden & Pet Co (CENTA), LG Display Co Ltd (LPL), Brocade Communications Systems Inc (BRCD) and Ingles Markets Inc (IMKTA).

    The table below presents the ten companies, their last price, their market cap and their industry.

    (click to enlarge)

    The table below presents the earnings per share for the trailing twelve months (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.

    (click to enlarge)

    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.

    (click to enlarge)

    Back-testing

    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

    (click to enlarge)

    (click to enlarge)

    Just a matter of curiosity, the table below presents the ten companies originated by the screen formula one year before, on June 02, 2012.

    (click to enlarge)

    Five years back-test

    (click to enlarge)

    (click to enlarge)

    The table below presents the ten companies originated by the screen formula five years before, on June 02, 2008.

    (click to enlarge)

    Fourteen years back-test

    (click to enlarge)

    (click to enlarge)

    The table below presents the ten companies originated by the screen formula fourteen years before, on January 02, 1999.

    (click to enlarge)

    Summary

    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 at 38.02% while the return of the S&P 500 index during the same period was at 29.56%, and the return of the Russell 3000 was at 30.41%. 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 22.45% while the average annual return of the S&P 500 index during the same period was only 2.08%, and the return of the Russell 3000 was at 2.76%. 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 AEY, BAMM, BHE, BRCD, CENTA, GASS, IEC, IMKTA, LPL, MPAC. 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.

    Themes: quick-picks-lists Stocks: AEY, BAMM, BHE, BRCD, CENTA, GASS, IEC, IMKTA, LPL, MPAC
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Comments (2)
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  • pierman
    , contributor
    Comment (1) | Send Message
     
    Will you update this list every 4 weeks when you re-screen and re-balance the portfolio?
    Thanks
    12 Jun 2013, 02:39 AM Reply Like
  • toddro
    , contributor
    Comments (153) | Send Message
     
    Nice article. I have been using Portfolio123 for a few months now and enjoying the screening / backtesting / rebalancing features. It has uncovered some gems! You have illustrated its use nicely here - thanks!
    8 Aug 2013, 12:11 AM Reply Like
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