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.
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
It’s much to 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.
To see how I crated 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
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When I go about creating screens, I base it 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 PE 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 PB
- Low PE
- 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 to 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 their 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 pull from the screen with additional data provided by the Old School Value Stock Valuation Calculator.
Top 10 Stocks from the NNWC Increasing Screen
Stock #1: Fuel Systems Solutions (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.
Fuel Systems Solutions assets look good surprisingly. For a stock trading near its NCAV, it has a lot of cash and equivalents and 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 (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 them, but at least their business is no longer centered around DVD storage.
Their NNWC has jumped dramatically from -$9.3M to $28.6M.
Is a turnaround in the works?
Stock #3: Pericom Semiconductor Corp (PSEM)
In terms of quality, PSEM is improving.
A quick way to judge is by looking at the 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.
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?