Forget book value, price-earnings-growth ratios (PEG) and dividend yield; it's time to go for momentum and low price-to-sales stocks. At least that's what this year's strategy screen reckons.
Reams of academic research into momentum investing backs the notion that it's possible to beat the market by buying the best-performing shares from a past period. The strategy screen, which I devised two years ago, tries to apply the principle of momentum investing to selecting investment strategies. And, while it's early days, so far the approach has been successful.
The screen had a fantastic run in its first year, and while the past 12 months have not been as stellar, it has once again outperformed the FTSE All-Share, producing a 5.2 per cent total return, compared with 4.8 per cent from the index. The cumulative total return now stands at 62.1 per cent, compared with 21.0 per cent. Applying an annual charge of 1.25 per cent for dealing costs reduces the cumulative return to 58.1 per cent.
| Name | TIDM | Total return (25 Feb 2014 - 9 Mar 2015) |
|---|---|---|
| Ashtead | AHT | 30.5% |
| CSR | CSR | 28.2% |
| Persimmon | PSN | 25.4% |
| 3i Group | III | 25.0% |
| Barratt Developments | BDEV | 22.7% |
| Petra Diamonds | PDL | 18.8% |
| Taylor Wimpey | TW. | 16.3% |
| DS Smith | SMDS | 13.1% |
| Redrow | RDW | 6.3% |
| Berkeley | BKG | 2.4% |
| Countrywide | CWD | -13.2% |
| Thomas Cook | TCG | -17.1% |
| SThree | STHR | -18.8% |
| Keller | KLR | -19.4% |
| Darty | DRTY | -42.7% |
| Average | - | 5.2% |
| FTSE All-Share | - | 4.8% |
Source: Thomson Datastream
The strategies the screen assesses are very basic and focus on a single factor. This year I have added a low price-to-sales (P/S) ratio strategy into the mix as P/S is considered by many to be a key indicator of value. The screen looks at the performance over the past three months of the fifth of the FTSE All-Share that look most attractive from the perspective of each of the nine strategies.
In previous years I have used the three best performing strategies to create the 'strategy screen'. This year, however, the returns from the best-performing strategies have been so close that I've taken a different tack. Indeed, a high-momentum strategy proved a mere 4 basis points superior to the low P/S strategy over the past three months. Meanwhile, the high 5-year-EPS-growth-rate strategy claimed its third-place position by outperforming the low-forward-PE strategy by just 2 basis points.
Given that you always have to allow for a margin of error when dealing with stocks-and-shares data, I feel these results really look too close to call. Therefore, this year I've run two separate screens. Both screens demand that shares display high (top fifth) momentum and low (bottom fifth) P/S, as these were clearly the two top performing strategies of the last three months. But for a third factor, one screen asks for high EPS growth while the other demands a low forward PE.
Between them, the screens have highlighted 19 stocks. The write-ups below cover the top three stocks based on highest momentum and the top three stocks based on lowest P/S. The other stocks that have made the grade are listed in the two tables that follow. One table is for stocks that have passed the high EPS growth screen and the other for those passing the low forward PE screen.
Highest momentum
