Our Market Beating Action Score – How Combining Quality, Value, Growth Metrics Produce the Best Results
(This article was updated on Jan 8 to include the latest 2016 results and to fix 2015 performance results. CAGR returns have also been updated to the latest with the completion of 2016. Click here to read the 2016 performance review.)
What You’ll Learn
- How the Action score is created using Q,V,G factors
- What metrics make up Q,V and G
- Backtested results showing 20% CAGR over 17 years
- Download the top 50 Action Score Stocks
I’m ready to share what I call the “Action Score”. A score showing how combining quality, value and growth produces fantastic results.
If you have time, check out the details of how I created the quality, value and growth ratings.
- Quality rating score creation, results and discussion
- Value rating score creation, results and discussion
- Growth rating score creation, results and discussion
Or here’s a quick summary for each.
How the Action Score is Built
As I mentioned, it’s a combination of 3 time and tested factors.
Quality stocks are ranked and scored based on
- CROIC – signals competitive advantage, management effectiveness. CROIC between 23-40 is the best range to be in.
- FCF/Sales – signals cash generation ability, how efficient a company is. FCF/Sales has to be positive.
- Piotroski score – signals fundamental strength. Highest is best.
The Value score is based on
- P/FCF – has the biggest impact on the results and receives the highest weighting
- EV/EBIT – does a great job of identifying cheap stocks and receives the second highest weighting
- P/B – acts as a “cleaning” filter to remove stocks where you overpay for assets. Also a way to remove bad stocks you wouldn’t want to own no matter how cheap it looks
- Piotroski score – assigned a fairly high weighting so that the list removes “lotto” stocks
Growth stocks are created using
- TTM sales percentage change – to find growing companies but also limited to a certain upper percentage to eliminate high flyers
- 5 year sales CAGR – to find growing companies that are not perennial losers
- Gross Profit to Asset Ratio (GPA) – a wonderful measure of profitability to find stocks that are making the best use of their assets to generate sales
- Piotroski F Score – assigned a fairly high weighting so that the list removes “lotto” stocks
Each stock is given a Q, V and G score based on its data and rank.
The Q, V and G scores are then averaged to give the final “Action Score”. I call it Action because these are the stocks I should be acting on. Whether it be reading, thinking or discussing.
How good are these Action Stocks?
Take a look.
The Final OSV Rating System – Backtested Performance
These are the latest and final backtested results based on the latest edition of the algorithm.
Full 2015 results are included to give a full 18 year backtest.
- Q% is the full year percentage return for stocks with the highest Quality Score
- V% is the full year percentage return for stocks with the highest Value Score
- G% is the full year percentage return for stocks with the highest Growth Score
- Action Score% is the full year percentage return for stocks with the highest average of the Q,V and G scores
- Top 20 stocks are chosen at the start of each year
- All stocks held to the end of the year
- Fees, volume, slippage not considered
- Dividends not reinvested
The final theoretical 29% CAGR performance of the Action Score is simply astounding, but it includes the entire universe of stocks in the backtest which skews the results.
There are thinly traded nano-cap OTC stocks that you wont be able to accumulate. Maybe $1000, but not $10,000 or more.
This is why you won’t be able to achieve the same results because it includes OTC stocks you won’t be able to buy due to limited supply or brokerage rules. Financial stocks are also included which skews results because certain ratios for finance stocks are inflated simply because of the nature of the business.
Consider this to be the upper range. Realisticly you won’t get higher than this number.
That’s why I created a second version that excludes;
- OTC stocks
It brings the final result down to 20% CAGR over a 18 year period.
To keep it conservative, I think real money results will come in around 13-15%. I’ll still be super duper happy with such long term results
and once this is fully launched and running, I’ll be looking into creating a real money portfolio to really put it to the test.
Update: with the launch of the Action Score, I have well over 6 figures of my personal and retirement money in this strategy. I eat my own cooking – in huge portions.
The Grading System
Each Action Score is assigned a grade to make it easier to identify and analyze.
- Greater than 85 = A
- Between 75 and 85 = B
- Between 65 and 75 = C
- Between 50 and 65 = D
- Below 50 = F
Distribution of 2016 Scores for Q, V, G and Action
You’ll see that I’ve purposely limited the number of A grade stocks.
Based on the data at the start of the year, here’s a look at the distribution of how many stocks are in each score range.
In the current list there are only 68 A grade Action Stocks compared to 498 B grade Action Stocks.
As you see below, a company really has to earn its place to get an A.
Find Winning Stocks with Access to Old School Value and Our Action Scores
You can get access to all stocks in our database and look up the Action Score grades and ratings for each stock. The idea of creating an algorithm to score and rate stocks is to eliminate the stock findig, analyzing, valuing and buying/selling process by more than 80%.
Most of the time is spent trying to find stocks and then figuring out whether it’s worth investing or not.
The Action Score drastically shortens the process by providing you with a barrel filled with fresh, plump fish to shoot.
You can also use the Action Score as a quant strategy. Buy the top 20 and hold for one year. The key is to not interfere with it too much.
To get started, check out the live demo.