High-quality large caps

But while London's main indices also posted an immediate post-referendum decline, last September's screen seems to have had a particular knack of picking stocks in those sectors that investors became most concerned about. Brexit's disproportionate effect on the selections wasn't entirely negative, however. The biggest single riser in the group was Unilever (ULVR), which on a forward earnings basis was last year's most expensive stock. That valuation has notably appreciated since the Brexit vote, thanks to the fast moving consumer goods giant's status as a dollar-earner in a weak sterling environment.

But house builder Crest Nicholson (CRST), budget airline easyJet (EZJ) and media group ITV (ITV) all failed to recover as much the FTSE All-Share benchmark, which has gone on a rally since the beginning of July, returning a total of 11.2 per cent during the life of the screen and boosting the cumulative performance to 59.6 per cent since 2011. The six companies selected by last year's stock screen, on the other hand, booked a total return of just 0.14 per cent, or an underperformance of more than 11 per cent.

Source: Thomson Datastream

The Brexit hit

That shouldn't dampen the screen's long-term record, which has returned 152 per cent on a cumulative basis since it was started in August 2011, or 137 per cent if allowing for a 1.25 per cent annual charge for re-investing the previous year's returns.

High-quality large caps vs FTSE All-Share (total cumulative return)

As the table below shows, re-investing the portfolio has worked well, outperforming a buy-and-hold strategy for any single year.

Source: Thomson Datastream

This should provide some reassurance that the screen can, in fact, screen for quality companies that aren't overly expensive. To do this, the screen looks at a range of measures of financial health, including interest cover and free cash flow, but its biggest focus is on earnings. To do this, it uses two earnings-derived measures of quality - operating margins and return on equity (ROE) - selecting only stocks which score better-than-average on these measures and have shown improvement over the past three years.

These tests set a high bar for quality and momentum, and with it the prospect for screening stocks with toppy valuations. The stock's valuation criteria also screens for quality on a valuation basis, excluding the market's most expensive shares based on a price-to-earnings (PE) ratio, and avoiding stocks that may prove vulnerable to even the slightest disappointment. Equally, the screen also omits the cheapest shares in the market in an attempt to avoid any stocks that are suspiciously cheap and could decline further. The third test of value is for shares with a lower-than-average genuine value (GV) ratio, which the screen's creator Algy Hall defines as price-to-earnings-growth (PEG) adjusted for cash and dividend yield. This is calculated by dividing enterprise value (a company's market capitalisation plus debt) by operating profits, and dividing again by forecast growth rate plus dividend yield.

While quite a few stocks passed at least 10 of the tests, just three gained a perfect score of 11 and are previewed below. To diversify that elite group, I have tweaked the criteria slightly to admit only those 10 scoring stocks which passed all of the ROE and operating margin tests, and whose valuations sat in the middle three-fifths of all companies screened. In an attempt to give the screen a more distinctive large-cap character, I have also restricted the screen to only those FTSE All-Share stocks with a market capitalisation above £2bn. Keeping the threshold at £500m or above - as it was in previous years - also allowed me to exclude Photo-Me International (PHTM), which owing to the inconsistencies of some of the FTSE's indices meant this was a recent pick in the High Quality Small-Cap screen. Applying all of these rules, six large-cap stocks made the cut.

The full criteria for the screen are:

■ PE above bottom fifth and below top fifth of all stocks screened.

■ Lower than median average GV ratio.

■ Earnings growth forecast for each of the next two years.

■ Interest cover of five times or more.

■ Positive free cash flow.

■ Market cap over £2bn.

■ Higher than median average RoE in each of the past three years.

■ Higher than median average operating margin in each of the past three years.

■ RoE growth over the past three years.

■ Operating margin growth over the past three years.

■ Operating profit growth over the past three years.

THREE HIGH QUALITY LARGE-CAP STOCKS

Ashtead

For the third year in a row, US-focused equipment rental group Ashtead (AHT) has ticked all the boxes in our high quality large-cap screen. And despite a strong share price performance in the last screen, it remains inexpensive against peers and exited its April year-end with gathering momentum, after posting strong fourth quarter profits.

The picture has changed considerably since this time last year, when the company was dogged by warnings from competitors of a softening in end-markets. Now, following a 46 per cent share price rise in the past six months, Ashtead's price has overtaken its earnings growth. That's the upside of holding shares in a company whose operational gearing tends to amplify broader economic trends, though there are signs that the short-term lender of diggers, drills and lifts can build its earnings profile further this year. After a 17 per cent hike in gross capital expenditure to £1.24bn in the 12 months to April, replacement spend is expected to decline to as little as £700m this financial year. As well as a flexible capital model, Ashtead has consistently boosted its margins by increasing the share of its 'rental only' revenue, while maintaining its physical utilisation rate. The likely test of this year's performance will be the continued buoyancy of North American construction markets, which has been particularly strong in the private sector.

Last IC view: Buy, 1,156p, 4 August 2016

Berendsen

The screen's definition of quality provides a distinct leaning to slower-moving consumer staples or support services groups rather than higher-risk technology or commodities stocks, a feature typified by this year's selection of laundry and textiles specialist Berendsen (BRSN). The FTSE 250 firm may not be a 10-bagger, but there are two reasons why its shares have climbed at a consistent rate over the past five years: a fastidious focus on margins and a remarkable rate of cash conversion.

Whether or not a re-organisation from country to business lines manages to wring out further profits, the group's most likely source of earnings growth will probably come from geographical and product line expansion. Signs from a push into Germany have so far proved encouraging, but at 18 times forward earnings, the share price is approaching peak historical valuation. So short of a major step-up in returns from workwear and products for sterile environments - the two divisions which have most recently benefited from investment - it is difficult to see Berendsen striding ahead of the market. Nonetheless, JPMorgan expects pre-tax profit of £151m for the December year-end, giving EPS of 67.4p and rising to £163m and 72.9p in 2017.

Last IC view: Hold, 1,293p, 2 August 2016

Mondi

One feature of the screen is its preference for unexciting companies over stocks whose valuations are built entirely on frothy investor sentiment. Johannesburg-headquartered packaging and paper specialist Mondi (MNDI) certainly ticks the defensive and boring boxes, but that doesn't mean it lacks in attractive operational and financial metrics. This was underlined by the group's recent half-year financial performance, which City analysts described as "solid". Mondi faces a number of challenges in the second half of 2016, including planned maintenance closures at a number of the group's paper mills, the usual seasonal downturn at the uncoated fine paper business during the third quarter and a lower-than-expected fair value gain from the group's own forestry assets.

However, management expects input costs to be broadly stable, while incremental contributions from capital investments should add a further €60m to operating profit in 2016, on the back of a respectable 52 per cent increase in the past three years. Analysts at Deutsche Bank expect this to continue too, with pre-tax profit of €877m predicted for the year ending December 2016, giving EPS of 136¢, up from €853m and 133¢ in 2015.

Last IC view: Buy, 1,549p, 8 August 2016

Source: S&P Capital IQ