2016 Free Value Strategies Performance Review

Written by

Jae Jun

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What You Will Learn

  • 2016 Performance of our pre-defined stock screens
  • 18 year performance of our pre-defined stock screens
  • Explanation and short discussion of each stock screen

Results are in.

First, I’ll be going over results of the free value stock screeners and then in a few days, I’ll post the results of the Action Score with a breakdown of how each grade did.

I’m also excited to share a report later this month where the Action Score was independently tested to verify the accuracy and expected returns of the Old School Value Action Score.

An OSV Member with a profession in statistics, performed this extensive and exhaustive testing as he wanted to be confident in the approach and strategy if he wanted to put money into it.

I understand.

It’s not easy trusting any sort of quant based system with your portfolio, especially if you’ve been hand picking stocks for so long. But there are two primary goals of the Action Score.

#1 goal of the Action Score is to provide you with the best playing field possible. With more than 10,000 stocks, it’s a brutal process to find stocks that you think will do well. You could copy other people (which is what usually happens), but the Action Scores provide you with a rich playing field full of potential stock ideas. This way, you can spend 80% of your time on analysis and valuation, not searching.

#2 goal is to make it easy for busy people. Not everyone has the lifestyle and time of being able to dedicated 1-2 hours on investigating stocks. For people who value their time at a premium, it makes it super fast and easy to try a quant strategy.

Results will surprise you. Don’t want to ruin the results so let’s first get into the OSV Predefined Stock Screener results.

OSV Predefined Stock Screens

The purpose of the free pre-defined screener page is a place for me to test ideas and strategies and share them. There are lots of screeners out there, but it’s mostly all the same and aimed at a broad audience. My focus is on the value investing community and that’s how screens like increasing FCF, and adjusting Ben Graham’s Checklist came about.

With 18 years of backtested data in the books, there are some clear winners and clear losers.

Here are the 2016 results.

2016 OSV Pre-defined Stock Screen Performance


First, here’s how each screen is built.

  • 20 positions max
  • buy at beginning of the year and hold until end of the year to minimize trading fees. No monthly or quarterly trading.
  • each screen has a minimum cost of 1.5%
  • screens with mostly smaller stocks include higher slippage

2016 End of Year Performance for each Stock Screen

Here’s the full view of the cumulative performance at the end of each quarter in 2016.

Click the image to enlarge.

2016 value stock screener performance

2016 cumulative performance at the end of each quarter

The common theme over the past several years is that cheap balance sheet stocks like Net Net Working Capital (NNWC), Net Current Asset Value (NCAV) and Negative Enterprise in the USA is not a good strategy.

With the bull market raging into its 9th year, cheap cigar butt stocks in the US are so soggy, you can’t light it for one last puff.

In other words, US net nets trade at such cheap levels because of their horrific operations. If you want to invest in net nets, you must use a manual net net checklist and process to filter through the good vs bad.

But, it’s not a place you want to be investing in right now when there are better places.

International net net stocks is a different story. Plenty of opportunities for cheap NCAV and NNWC stocks.

Evan Bleker at net net hunter is currently the man when it comes to international net net stocks so check his site out.

Overall despite the volatile year 2016 turned out to be, the end results were decent.

Description of Each Screen

As I mentioned in the beginning, each screen is custom built and value focused that I created based on different ideas and concepts I had at the time.

Altman Z Stock Screen

The Altman Z score formula is used in predicting bankruptcy up to two years in advance.

The screen identifies companies with an Altman Z score above 3 as it is deemed safe if the Z score is above 2.6.

Altman Z Score = 1.2*X1 + 1.4*X2 + 3.3*X3 + 0.6*X4 + 1.0*X5

Read more: Altman Z score screener backtest

Ben Graham Checklist Screen

A stock screen based on Benjamin Graham’s stock selection criteria consisting of 10 points. Results show that just four out of the ten criteria produce the best performance.

Criteria 1: An earnings-to-price yield at least twice the AAA bond rate
Criteria 2: P/E ratio less than 40% of the highest P/E ratio the stock had over the past 5 years
Criteria 6: Total debt less than book value
Criteria 7: Current ratio great than 2

Read more: Benjamin Graham stock selection backtest

Ben Graham Formula Screen

A screen based on Benjamin Graham’s original intrinsic value formula.

V* = EPS X (8.5+2g) X 4.4 / Y

V is the intrinsic value, EPS is the trailing 12 month EPS, 8.5 is the PE ratio of a stock with 0% growth and g being the growth rate for the next 7-10 years.

Y is 20 yr corporate AAA bond rate.

The original formula produces values at the upper range and so the formula has been modified to err on the side of conservatism.

V* = EPS X (7+1.5g) X 4.4 / Y

Read more: Value stocks with the Graham formula

Cash Return On Invested Capital (CROIC) Screen

This screen is designed to identify turnaround stocks by searching for companies where CROIC has been increasing for 3 years.

CROIC and ROIC are ratios to determine the profitability and effectiveness of a company.

CROIC = FCF/Invested Capital

ROIC = NOPAT/Invested Capital

CROIC uses FCF in the calculation which is a safer and better method to understand management effectiveness.

Read more: CROIC and ROIC stock screen backtest

FCF COW Screen

Screening for stocks with increasing free cash flow (FCF) and reduction in debt.

This screen is labeled “FCF cows” as it seeks to find stable, cash rich companies growing their FCF, yet selling at a cheap multiple to FCF.

The standard definiton of FCF is used.

FCF = Cash from Operations – Capex

Cash is king and the more FCF a company can generate and reduce debt, the higher the intrinsic value of the company becomes.

Read more: FCF stock screen backtest

Insider Buying Screen

A screen that seeks to identify companies where insiders are buying on the open market without any recent sale transactions.

Insider buying indicates management to believe the company has a brighter future and is trading at a cheap price. Like all investors, the only reason an insider buys stocks is to make a profit.

Read more: Insider buying stock screen backtest

Low Market Expectations Screen

A screen for companies where PE is between 7 and 8.5.

Benjamin Graham said that 8.5 is the PE of a stock with zero growth. If a company is being priced for zero growth, the downside is protected as the market has given up on the company. Conversely, any upside the company displays will surprise the market and shoot it up.

Read more: Low expectations screen backtest

Joel Greenblatt Magic Formula Screen

In the book “The Little Book that Beats the Market”, Joel Greenblatt came up with a simple way to screen and invest in stocks.

The Magic Formula screener methodolgy he outlined is as follows:

  1. Establish a minimum market capitalization (usually greater than $50 million)
  2. Exclude utility and financial stocks
  3. Exclude foreign companies (American Depositary Receipts)
  4. Determine company’s earnings yield = EBIT / enterprise value
  5. Determine company’s return on capital = ebit / (net fixed assets + working capital)
  6. Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages)
  7. Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period
  8. Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark
  9. Continue over a long-term (3–5+ year) period

The two key points of the Magic Formula stock screen is based on:

Earnings Yield = EBIT / Enterprise Value

Return on Capital = EBIT / (Net Fixed Assets + Working Capital)

To get the full performance details from 1988 read the link below.

Read more: Does the Magic Formula Screen work?

Negative Enterprise Value Screen

Stocks that pass this screen have excess cash far outweighing debt but are viewed negatively by the market.

Enterprise value accounts for debt and subtracts the excess cash from the equation. If enterprise value results in a negative number, the conclusion is that the company is loaded with excess cash, hence a cash rich company trading for less than it’s value.

Read more: Negative enterprise value screen backtest

NCAV & NNWC Screen

Screens for stocks where the price of the stock is trading below the Net Current Asset Value (NCAV) or Net Net Working Capital (NNWC).

The market discounts all forms of growth and estimates the value of the company to be worth nothing more than the assets.

With current assets capable of paying off total liabilities, downside is very limited.

Read more: NCAV NNWC backtest

NNWC Increasing Screen

This screen displays companies with positive and increasing Net Net Working Capital (NNWC) compared to the previous quarter.

Such companies have been able to increase cash, accounts receivables and/or inventory at a much higher rate than debt.

NNWC = Cash & Equivalents + (Accounts Receivables x 0.75) + (Inventory x 0.5) – Total Liabilities

Read more: NCAV, NNWC and increasing NNWC backtest

Best Piotroski Criteria Screen

This screen uses only the best performing criteria from the Piotroski score.

The original Piotroski score is a fantastic tool to detect the quality of a company, but not all the criteria is as important as it seems. This screen is an improvement on the original Piotroski score stock screen by utilizing only the best performing criteria.

Read more: Best Piotroski Combination Backtest

Original Piotroski Screen

Earning a Piotroski Score of 9 places a company onto this screener.

The Piotroski scoring system is a nine point system to determine the strength of a firm\’s financial position.

The higher the score, the better the company is from a financial standpoint.

Read more: Piotroski score screener backtest

Share Buybacks Screen

A screen for companies where the shares outstanding for the most recent quarter is less than the trailing twelve month shares outstanding.

By reducing the share count, the intrinsic value for each share increases. In other words, shareholders are receiving a bigger piece of the pie.

Additional criteria include insider ownership of 5% or more as well as recent insider buying.

Read more: Share buyback screen backtest

18 Year Performance Results

Put all those screens together and you get this performance table.

Click to enlarge, or right click and save.

18 Year Historical Performance for all Screens

18 Year Historical Performance for all Screens

The screens are arranged by their 3 year CAGR performance and not the total CAGR.

Here’s what I see when I look at these results.

  • 10 out of 15 screens outperform over the 18 years
  • most underperform based on 3 year CAGR
  • only 6 outperform the 5 year CAGR

It’s easy to conclude that

  • many of the screens are currently outdated and need to be “remodeled”
  • quality based screens do better than simply value based
  • use the screens for ideas only because there are still plenty of great ideas in there

But looking at this does confirm that it was a good idea to have created our OSV Action Scores. Having an uncrowded strategy that people can’t copy makes it easier to follow and outperform.

I’ll be going over the 2016 Action Score performances and breaking down the data. A lot different to how the pre-defined screens have performed (hint hint).

If you haven’t checked out OSV Online, our new stock grading and fundamental tool, you can try a live demo. With 2017 under way, it’s a great time to get access to our full list of stock grades and rankings. We’ve made it so that instead of fishing in an open ocean looking for a fish to catch, you’ll be fishing in a barrel full of fish.

Look out for the Action Score performance review soon.

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