See Which Value Strategy is Pounding the Market

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Value Strategy

Q2 for the value strategies have been a disappointment for the most part.

Q1 was strong, but the value strategies that I follow weren’t able to keep up in the second quarter.

At the end of the first quarter, 9 out of the 16 stock screens (60%) were beating the market. That is now down to 5 out of 16 screens beating the S&P500 for a win rate of 31.3%.

Here’s how all the value screens did last year.

The order is sorted in descending order based on the end of year performance.

But first, something important that most people get confused about.

The value stock screens are predefined results free for visitors.

It is not part of the Stock Analyzer package. The Stock Analysis software is a “stock analyzer” providing deep fundamental analysis and valuations.

It does not screen for stocks or perform backtests.

Now that I’ve gotten that clear, let’s continue.

The Value Stock Screener Performances

2013 Performance at the End of Each Quarter

2013 Performance at the End of Each Quarter | Click to Enlarge

You can read up on the idea behind each screen and how it was backtested from the main stock screener page.

Compare last years performance with the Q1 and Q2 performance of 2014 below (descending order).

2014 Q1 Results

2014 Q1 Results Descending Order of Performance

2014 Q2 Results

2014 Q2 Results Descending Order of Performance

Now here are the Q1 and Q2 performances side by side, sorted by the Q2 numbers.

2014 YTD Results Side by Side Descending Order

The Altman Z screen was at the bottom in terms of performance last year (still gained 27%), so it’s good to see it at the top. It also goes to show that one strategy won’t work every single year.

All those claims you see on the internet are mostly lies.

So expect periods of underperformance even with the screens that I have up. And that’s the difficult part with mechanical investment strategies because it’s difficult to know whether your starting point will be a good time or not.

A leap of faith and trust in the numbers and research is required to stick to the strategy.

On the flipside, the Piotroski Best screen as well as the FCF Cow are fairly consistent.

I should really try combining the Piotroski Best and the FCF Cow screen to see what I come up with.

What do you think?

What two screens should I try combining?

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Quick Recap of the Stock Screen Descriptions

Before I go further, let me give you a quick run down of what strategy each screen follows.

Altman Z

Piotroski Best


  • Looks for increasing FCF from the previous year along with inproving FCF/LongTermDebt to find strong companies.

NNWC Increasing

Magic Formula

Graham Formula

  • Searching for stocks where the Graham Formula is less than 66% of the stock price. Looking for a big margin of safety here.

Insider Buys

  • Strategy that follows insider buy and sell transactions. Also include stock options in this screen.


  • Just replicating the original Piotroski score and all the stocks with a score of 9.


Share Buybacks

  • Much like the insider buys screen but uses company share buybacks as signals.

Low Expectations

Graham Checklist


  • Best performing strategy since I started following each one closely. Not for the faint hearted.

Negative Enterprise

  • Another category of cheap companies stockpiled with cash.

A Deeper Look at the Altman Z Stocks

There are some claims that the Altman Z is outdated and shouldn’t be used in this day and age.

Take a look though.

Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 +1 X5


X1 = Working Capital / Total Assets

X2 = Retained Earnings / Total Assets

X3 = EBITDA / Total Assets

X4 = Market Value of Equity / Total Liabilities

X5 = Net Sales / Total Assets

Here are the rules for interpreting the Altman Z score.

  • When Z is >= 3.0, the firm is most likely safe based on the financial data.
  • When Z is 2.7 to 3.0, the company is probably safe from bankruptcy, but this is in the grey area and caution should be taken.
  • When Z is 1.8 to 2.7, the company is likely to be bankrupt within 2 years.
  • When Z is <= 1.8, the company is highly likely to be bankrupt.

The Z score itself isn’t as accurate today.

That’s true.

But the ratios (X1 to X5) are useful financial ratios. You can read about each in more detail and how it is used from the Altman Z discussion article.

The Current 2014 Altman Z Portfolio

Here are the stocks that make up the 2014 Altman Z Screen.

All stocks are held for one year with equal weighting.

Even if I believe a stock has reached intrinsic value, it stays. No sells.

The purpose is to keep it objective with minimal expenses.

Stocks that Currently Make Up the Altman Z Stock Screen

Stocks that Currently Make Up the Altman Z Stock Screen

Looking at the results YTD, although the positive and negative stocks are balanced, the winners far outweigh the losers.

Sad to say that I’ve written about SYNA a couple of times already and just waiting for a better marge of safety. Didn’t come down to my buy price.

Maybe I was too strict with the growth and price requirements.

Any stocks in this list that you hold or want to know more about?

20 Stocks from the Altman Z Screen Today

The 2014 Altman stocks may not help you much if you’re looking for cheap stocks.

How about the following?

Remember that these stocks are not from the Stock Analyzer. I use my stock software to further filter down a list like this by calculating the fundamental data and intrinsic value estimates.

Latest Altman Z Stocks | Click to Enlarge

We’ll see whether Mr Altman Z can keep it up to the end of the year.

  • So which two screens do you think will work well when combined? Far too many combinations to try everything.
  • Do you hold any of the stocks mentioned here?

Disclosure: None

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14 responses to “See Which Value Strategy is Pounding the Market”

  1. GC says:

    Thanks for the analysis and the input. Your blog has really been very helpful and informative as I continue my journey in learning as much as possible about valuation.

  2. Hermann says:

    Really great update. I’m currently running an experiment where I’m implementing magic formula, merriman ultimate and bogle lazy 3 for the next 5 years.

    I have to say what makes it hard is NOT DOING ANYTHING.

    When I back test strategies or even run test portfolios this is very different than when you put really money to work as I’m sure all of us know :).

    When I started in March I thought by having a very clear thesis it wouldn’t be as hard but when you see an MF stock drop 50% while the seemingly over valued market keeps going up its very hard not to react. That’s real money seemingly going away. Of course we all know that it’s not really gone until we sell and of course we all know that predicting/timing the future is challenging which is why we need strong investment theories.

    Nevertheless… this knowledge does not temper the fundamental desire to act. It’s the institutional imperative on a personal level.

    It’s hard to believe that most of our actions are value destructive… but I think in investing that is the case. Often the best thing is to do nothing. Go out and play with your kids or run a few miles.

    To keep myself from violating my experiment I’ve set aside some money that I can tinker with on my own. I try to be very disciplined with what I buy there as well but again its very hard to stay with the original thesis. Part of why I read and try and do valuations is to forget about market prices and relative short term portfolio performance which, while meaningless, exert very powerful psychological pressure.

    I think that “urge to do something” is why so few people who have the ability to be good investors have such a hard time. MF, low p/e, indexing, buying moats. All those things work and most of us are smart enough to do them… but I think few people have the psychic strength… especially if things move against you early in the process.

    To really see the markets primarily as liquidity tools which serve your valuations is incredibly challenging.

  3. Amazing analysis as usual, thank you. It can be frustrating to watch performance of value screens over short periods of time, my real money value strategy has underperformed the past few months, but I try to zoom out and look at a longer time frame. And it almost always beats the market. I believe value investing always works, if you give it enough time.

  4. frankiethepunk says:

    I think you are spot on. The most valuable words of wisdom I have heard are from Charlie Munger who described “assiduity” as one of the most valuable traits of the investor. (i.e. assiduity is the ability to sit on your ass for long periods of time and not frig with your portfolio.)

    Joel Greenblat has also pointed out that it is not uncommon for the best performing long term investment funds have spent at least 3 years in the bottom deciles of performance rankings.

    I think its absolutely essential not to get seduced by short term action. As Graham admonished, if you must speculate, confine it to a small part of your portfolio. This constant churning of one’s portfolio really accomplishes nothing.

    It is far better to have a solid well grounded strategy that builds wealth slowly but surely. In the money game, its the tortise that wins the race not the hare.

  5. thenameisdietrich says:

    I agree with everyone else. Great article as usual! One idea that has always tickled the back of my mind was a reversal of sorts of the “Unholy Trinity” by James Montier.
    Piotroski Best
    First thought says that should be a powerful grouping…but as usual…first impressions can be deceiving.
    (On a side note I always hear Yogurt’s voice from Space Balls when I think of the Unholy Trinity for some weird reason)

  6. richard gordon says:

    Here’s an idea that might cure you of that problem. I have an account with the FT which I set up a phantom portfolio of 9 stocks starting in October 2011. This portfolio was to evaluate the soundness of my investment selection methodology. Now, needless to say, I haven’t committed any real money to it, so its an “intellectual exercise” I rarely bother to check how the stocks are doing since I don’t have any money committed to the portfolio. Needless to say, I have made no changes or adjustments to the portfolio. About 3 1/2 years later the portfolio has increased by 60%. Its best performance has been the last 12 months with an increase of 33%.

    Every time I am inclined to meddle with my portfolio I am reminded by the this portfolio that the best strategy is simply to leave things be.

    Incidentally, one stock has declined by 77% (its still in there) and the second worst performer is only up by 2%. So the moral of the story is just leave things be!

  7. Darren says:

    I just wanted to note that the Altman’s Z-score is a little bit of a strange measure to use. Having had read the original academic paper, here are a few notes on how it is calculated.

    1. It was quite old (original was in 1968), so the economy was quite different with more manufacturing firms (a disproportional amount used in the sample in fact, relative to how the economy exists today).

    2. It is not “econometrically sound” (not to me at least). The original article was based off 100 companies (very small), 50 who went bankrupt and 50 who did not (I don’t remember the criteria used to select these but I remember that it wasn’t “sound”), which violates the mandate that the sample should be taken “as is”. It would be like saying that on average 50% of companies go bankrupt in any given year. Doing this would understate the accuracy of the individual measures that are common between the sampled firms. I do know there was an update to the formula, but I remember reading it and the methodology didn’t instill any more confidence in me.

    3. It is a probit model regression, based off whether companies went bankrupt, so it isn’t a ratio you would use to predict a return rate, but more akin to a credit rating. I will say that it’s use on this site can be thought of as “appropriate”, but it’s use would limited to finding companies going through temporary financial distress and predicting the company will make it out. But one should be using a different methodology to prioritize which companies to invest in based on rates on return and the Z score should be used to either cull a list or as a final check.

  8. Mike says:

    Do you know how to program excel with IF(AND(OR())) programming? Since a lot of investors are using basic screens, I think the best sustainable screen would be a more dynamic one where if this and this is true OR this, this, and this are true OR this and this are true or this and this PLUS/times this and this are greater than this or that… Then the stock yields a selection. If you don’t… It shouldn’t take more than 10m to read up on it and brief practice for a few days until you get the hang of it to really get it. But people tend to curve-fit data.

    Example, If any one stock blows away numbers in any one area you include it, otherwise you need elements of each for strong average “score”, otherwise you need strong elements of the two most important ones plus moderate value elsewhere….

    Or you might use it to have formulas specific to certain industries. If you get really complicated you might look at the industry average score so you are finding value relative to the industry, and then separate analysis to determine if the industry itself is undervalued.

  9. Great comment Hermann. I totally agree. Some of my best moves have been a result of doing nothing.
    Instead of following the urge to “do more”, less is more.

    A lot of bad mistakes and underperformance resulted from being too active and trying too hard.

  10. Value investing will underperform short periods of time. And that’s why it will never go away. Most people won’t be able to stick with it.

    The long term performance is what matters. Not everyone is Buffett or the elite fund managers who do this 24/7 and are able to beat the market every year.

    It’s ok to underperform. The long term is what counts.

  11. interesting. I didn’t think of incorporating Altman Z with anything. I’ll put it on my list to see whether anyone comes up with other ideas.

  12. Hey Darren,

    Your’e right on those 3 accounts. The Z score was definitely suited more for a market consisting of a lot of manufacturing companies. It’s important to put things into context.

    It’s why I prefer to use it as a checklist instead of a valuation or predictive metric.

  13. Yes IF,AND, OR statements are quite easy. Not always the most efficient.

    But my screens to factor in OR AND statements. If criterias are not met, it isn’t included.

    However, I don’t see the point of running companies through another IF statement if it already passes my criteria.

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