2010 Value Stock Screen Performances


2010 Old School Value Screens

The 2010 Old School Value Screen performance results are finally in.

Having had the screen up from the beginning of last year, I am excited about the progress made by the screens because it helps me to understand whether the strategies I have come up with work or not in the market. It gives me an opportunity to further test and fine tune my research as well as challenging whether the screen deserves to exist.

The screens and backtests have gained a lot of popularity over the past year and I will take this opportunity to answer a few of the most frequently asked questions.

1. The screens are based on personal research and while I will share the overall method and concept, in order to keep the screens free, the exact criteria and methods will not be shared. It helps to keep it as effective and proprietary as possible.

2. Screens are updated a couple of times a week. I do not have the resources to be able to run it in real time. So far it is all manual work.

3. Because the screens are configured and maintained manually, there is no way to allow for user input.

2010 OSV Passive Portfolio Performance

In December 2009, I decided to create and test a passive/mechanical portfolio based on companies I deemed to be cheap. Cheap is defined as trading below intrinsic value as calculated by DCF, Graham’s formula and EPV using my stock valuation spreadsheets.

The above performance graph is taken from tickerspy.com where I am tracking the stocks. The dotted line is the S&P500 (price return).

At the end of 2010, the performance for the OSV passive portfolio was up close to 38%. (Sorry but tickerspy has a horrible method of displaying results so I can’t figure out the exact number)

I had a few reasons why I started this.

1. I wanted to see whether a company valued cheaply based on DCF, Graham’s formula and EPV really was undervalued

2. To see whether a new mechanical method based on valuation rather than ratios would work

3. To verify whether the way I see and value stocks and use my valuation spreadsheets was correct

So far the portfolio is a success but 1 year of performance is not enough to conclude anything concrete. Especially when the market has been rising so steadily.

All I can say is that I really should have more conviction in the way I value stocks 🙂

The portfolio currently has 19 stocks. In the past year, I only sold 7 stocks total so the turnover and activity has been very low, which is what it was designed to be like.

The biggest gainer of the year was TWIN at 136.5%. The worst performer is BAMM at -22.8%.

In order to make this test realistic, I am not selling and replacing all the stocks now that we have hit 2011. I will be continuing with what I have and selling and buying according to what my numbers tell me.

2010 Value Screen Performance Results

An important point to note with the results is that my screen is unable to calculate dividends for total returns which would mean the actual screen results would be roughly 1-2% higher. However, I have just kept it at the price return vs the S&P500 and Russell 2000 total return. I’m giving the index a little advantage, but that is ok. Aiming for a higher goal is always better.

Overall, I am pleased and impressed with the performance. A bit jealous that an automated screen outperformed my 2010 results but happy my research is correct (so far).

Value Screen Explanations

Negative Enterprise Value (Cheap Stock Screen)

One of the very first screens I created. I wanted to find cash rich companies with little to no debt.

Seeing how the formula I use for Enterprise value is

Enterprise Value = Market Capitalization + Total Debt – Excess Cash

where

Excess Cash = Total Cash – MAX(0,Current Liabilities-Current Assets)

if the Enterprise value of a company is negative or well below the market cap, then it shows that the company is loaded with excess cash.

Recently, I have been informed that there is an error with the negative enterprise value screen. If you look at the compilation of companies listed in the results, you will notice that they are mostly international companies. The issue is that although the market cap may show up in US dollars, the balance sheet figures are not always converted to US dollars but remains in the local currency.

This leads to the numbers from the balance sheet being inflated when used in the formula and screen.

Altman Z Screen (Quality Screen)

The Altman Z screen is a quality factor screen and has performed admirably in 2010.

I never did a formal backtest of the Altman Z screener but it has been discussed previously along with a free Altman Z spreadsheet for you to play around with.

CROIC Screen (Profitability Screen)

I first came across this ratio from F Wall Street (read the book if you haven’t) and use it constantly. One of my favorite investing ratios to determine the profitability of the company. A company is eligible in this screen if its CROIC has increased for the past 3 years.

You can also view the CROIC screen backtest and discussion.

FCF Cow Screen (Cash Flow Screen)

Good ol’  FCF did not disappoint. A simple cash based screen to find cash rich companies with reduction in debt.

Graham Checklist Screen (Cheap Stock Screen)

I launched this new screen recently after the lengthy study and trial and error after having read Benjamin Graham’s paper on stock selection. Graham had a checklist of things to look for in a stock which I backtested in order to narrow down the best performing criteria.

Although the screen beat the S&P500 index, 2010 was a difficult market for Benjamin Graham based screens because there really were not that many that companies that could fully satisfy his conditions.

Graham Formula Screen (Valuation Screen)

My very first stock valuation based screen. I am using my modified version of the Benjamin Graham formula from The Intelligent Investor.

Stocks trading at 66% or lower to the Graham formula shows up on the screen.

Insider Buys (Shares Screen)

Insider buying is a great indicator of undervalued stocks.

Stocks are bought for purely 1 purpose, to make money. Had you simply followed the insiders with their purchases, you would have still beaten the S&P by a large 4.6% margin.

NCAV and NNWC Screen (Asset Screen)

According to my results, these two screens performed the worst. There were a couple of companies in the screens that paid off a large dividend which sent the stock price down, and seeing as how my screens do not account for dividends, it is considered to be a price drop. Thus causing the large decline in performance.

Due to the size of the companies in this list, it also ends up having a big effect on the total performance. I will have to adjust some parameters in order to filter out these types of stocks.

I also use the NCAV and NNWC screen as a barometer of market conditions. In 2008-2009, there were plenty of stocks making the list, but today, there are less than 5 stocks in each of the NCAV and NNWC screen. A true testament that the market is  not cheap.

NNWC Incr Screen (Asset Screen)

The second highest performer in 2010. Unlike the NCAV or NNWC screen where you are looking at companies trading below their asset value, this screen focuses on companies where cold hard assets have been increasing.

IFON is a stock where the NNWC has been increasing. Hint Hint. Chroma Investing has been following the stock since April 2010.

Oh and here is another free NNWC spreadsheet for you.

It would be interesting if the CROIC screen was combined with this one. Increasing profitability with increasing assets.

Piotroski Score Screen (Quality Screen)

The Piotroski Screen is one that I’ve come to appreciate greatly as the companies that show up on this screen are fundamentally very good. I found UFPT from the Piostroski screen which is a buy if it ever comes down to my $10 target level.

Learn more about Piotroski and download the free companion Piotroski spreadsheet as well.

Share Buyback Screen (Shares Screen)

If a company reduces their share count, the earnings will be divided by a lower number resulting in higher EPS. A higher EPS equates to joy on Wall Street.

Seems like there was something to be joyous about because the screen was able to beat the S&P500.

Screens Currently In Progress

I have some other screens that are a work in progress.

One of the ones I find most interesting is the screen to detect distressed stocks. I am trying to emulate the GGP’s, PIR, VVTV’s, CPW and now BGP’s. It isn’t perfected yet as it is still producing plenty of garbage stocks but progress is being made.

The magic formula screen is also one that people ask regularly about which I will try to create. Based on what I’ve seen, Greenblatt’s magic formula is definitely not as easy to replicate as I thought it to be. I’m sure he is hiding some details from the book. But not to worry, reverse engineering problems has always been my specialty.

  • Hey Jae,

    You talked about two backtests for NCAV strategies. One of them included a 1/3 margin of safety and the other didn’t. Without getting too much into specifics with your particular strategy are you including a 1/3 margin of safety in your strategy talked about above? As I understand Graham, that is a fundamental part of his NCAV strategy.

    -Evan

  • @ Evan,

    I do have that condition for the NCAV but not for the NNWC because NNWC will always be below NCAV and is based on discounted assets anyways.

  • Hm…. thats some pretty huge under-performance without including those dividends. How do you think this method would have worked if you had included those dividends in calculating your returns?

    You mentioned screening out those companies small enough to be effected by big dividends. I think that would make it easier for accurate presentation but it might not be the best treatment of this situation: it would be directed at achieving a better presentation of results instead of accurately presenting the results of the best strategy. You should tinker with how you record returns so you don’t have to change which companies you are including.

    Just some thoughts.
    Evan

  • Gil Meriken

    What happened your FWall Street DCF valuations based on owner earnings?

    I’ve been using that method (Discounted Free Cash Flow Growth + total equity) to value companies, and what’s surprising is how many Japanese companies turn up as significantly undervalued to their market prices.

    Nippon Telegraph Telephone (NTT), Sony (SNE), Panasonic (PC), Toyota (TM), and Honda Motors (HMC) all appear to be steals according to the FWallStreet valuation.

    Does anyone know why this would be? Do Japanese companies somehow report their cash flows differently than domestic stocks? I’m not looking for a macro answer necessarily (like “Japan’s economy is not growing), but more of a financial reporting reason.

  • What do you mean by what happened to it? I didn’t have a screen for DCF to begin with.

    For foreign stocks, make sure the currency has been converted. A lot of the company info is in the local currency or is incorrect.

  • jock

    Jae Jun – how often do you perform the various scans? Is there a way you can post on a given scan the date when it was created? I think it is important to know whether a scan is “fresh” or “stale” … Thanks in advance.

  • @ jock,
    As I wrote in the beginning of the post

    2. Screens are updated a couple of times a week. I do not have the resources to be able to run it in real time. So far it is all manual work

  • jock

    Jae –

    I was struck how 3 of your screens WAY outperformed the averages, while the others didn’t. Is this common? Do the best performing screens change year to year?

    Also, when you report screening results, it would be very helpful if you date them, so that readers can know which scans are “fresh” and which are “dated”. Do you have a set scanning frequency?

    Thanks in advance for addressing these questions. Your site is GREAT, and is teaching me a LOT. Thanks for that.

    Jock

  • @ jock,

    It all depends on the market condition. As you can see from the results in a bull market, NNWC and NCAV stocks don’t do very well because these are ignored while people rush towards the newest biggest thing.

    I created a variety of screens to to be able to get stock ideas regardless of the market condition so this year, the results could be completely the opposite.

  • sergiovlc

    Jae,

    If a stock popped up in more than one of your screens would that confirm that it is a good or better stock to buy?

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