As regular readers of this column will know, my screens have had a storming run recently. Since the start of the year all of the 10 screens I've updated have comfortably outperformed the relevant indices in their most recent period and seven of them have produced more than double the return of the index in question (see table). But there is one certainty that can always be relied on during a run such as this - it will come to an end at some point.
All good things come to an end
| Stock screen performance |
|---|
■ Cheap Small Caps: 1-year total return 44.5% versus 23.2% (FTSE Small Cap) ■ Classic Momentum: 3-month share price return 15.1% versus 4.2% (FTSE 100) Since inception (Jun 2007): 106% versus -2.0%. ■ Genuine Value: 1-year total return 40.6% versus 12.6% (FTSE All-Share). ■ Strategy Screen: 1-year total return 50.5% versus 13.1% (FTSE All-Share). ■ O'Shaughnessy Value: 1-year total return 16.7% versus 9.9% (FTSE 350). Since inception (Feb 2011) 32.8% versus 25.8%. ■ O'Shaughnessy Growth: 1-year total return 45.3% versus 9.0% (FTSE All-Share). Since inception (Feb 2012) 87.2% versus 24.2% ■ Joel Greenblatt's magic formula (top 10): 1-year total return 28.1% vs 10.6% (FTSE All-Share). Since inception (Jan 2011) 121% vs 27.6%. ■ John Neff: 1-year total return 42.2% vs 15% (FTSE All-Share). Since inception (Jan 2012) 88.4% vs 34.4%. ■ Inflation busters: 1-year total return 31.2% vs 16.7% (FTSE 350). Since inception (Jan 2012) 60.0% vs 29.3%. ■ Piotroski: 1-year total return 49.7% vs 17.6% (FTSE All-Share). Since inception (Jan 2012): 94.3% vs 33.7%. |
Source: Thomson Datastream
It is my 'US Recovery' screen - which looks for high-quality, FTSE 350 stocks with significant US exposure - that has broken the record of outperformance. The 13 shares picked by last year's screen have produced a total return over the last year of 5.7 per cent compared with 8.1 per cent from the FTSE 350 (see table).
OUCH!
| Company | TIDM | Total return (25/03/13 - 17/03/14) |
|---|---|---|
| Bodycote | BODY | 50.8% |
| Reed Elsevier | REL | 23.5% |
| Senior | SNR | 23.1% |
| Micro Focus International | MCRO | 19.1% |
| Weir Group | WEIR | 16.7% |
| Halma | HLMA | 16.4% |
| InterContinental Hotels | IHG | 2.8% |
| Spectris | SXS | -2.8% |
| Croda International | CRDA | -10.0% |
| Diageo | DGE | -10.3% |
| Intertek | ITRK | -11.0% |
| Unilever | ULVR | -11.1% |
| Genus | GNS | -33.1% |
| Average | - | 5.7% |
| FTSE 350 | - | 8.5% |
Source: Thomson Datastream
Screening based on a very specific theme always runs the risk that sentiment will turn against the theme in question. But in the case of this screen, the main cause for its underperformance seems to actually lie with a by-product of targeting companies with high US exposure - namely, these companies often tend to have high exposure to other international markets, too, including emerging markets. Indeed, it is the change in sentiment towards emerging markets and the weakness of their currencies that seems to have played the principal role in the disappointing results. That said, the cumulative total return over the two years I've been running the screen (based on mid-to-mid prices and ignoring dealing costs) of 30.1 per cent is still a little above the 27.1 per cent from the FTSE 350 (see graph and table).
US plays versus FTSE 350
Source: Thomson Datastream
The question of emerging markets exposure has also been an issue for my recent 'inflation beaters' stocks screen. That screen looks for exposure to international markets to offset the currency debasement that often accompanies periods of high inflation. But this screen strongly outperformed in the year to 8 January 2014 (see table above).
Timing will have played a part in the superior performance of my 'inflation beater' but it is also worth noting that the screen, although primarily based on looking for underlying corporate quality, does included a valuation criteria based on dividend yield. The US Recovery screen by contrast, is solely concerned with quality and lets price take care of itself. My other 'quality-will-out' screens have performed well at the time of recent reviews, but change may be afoot.
The central theme of this screen - gaining US exposure - still feels fairly in vogue despite last year's poor run. Continued tapering of the Fed's quantitative (QE) easing programme should be good for the dollar and therefore for companies generating revenues in dollars. And while tapering concerns have spooked the market somewhat, the fact that the Fed is confident enough to take this action reflects well on the health of the US economy. The fly in the ointment is that due to the flows of capital into emerging markets caused by QE, the reversal of the policy could continue to have negative implications for these regions and, as already noted, this screen does tend to pick stocks with emerging markets exposure. Nevertheless, I am re-running the screen with the warning that it now has a rather contrarian slant to it.
| Hunting for US exposure |
|---|
■ At least a quarter of revenues must be derived from the US (sometimes segmental reporting can include revenue from both north and south of the boarder). ■ Underlying EPS growth in each of the past three years. ■ Forecast EPS growth in each of the next two financial years. ■ DPS growth in each of the past three years. ■ Net debt of less than 2.5 times cash profits. ■ Return on equity of 10 per cent or more. ■ Three-month share price momentum greater than the FTSE 350 (1 per cent) |
Given the screen's insistence on positive momentum relative to the FTSE 350 and the emerging markets headwinds faced by many of these stocks, it will perhaps come as little surprise that relatively few companies made the grade this year. I've provided write-ups of the six that did below, ordered by strongest to weakest three-month momentum.
Six ways to play the USA
