Following last week’s impressive showing from James O’Shaughnessy’s cornerstone value strategy, it’s the turn of his growth screen to shine: shine it does boasting a 124.4 per cent total return over four years compared with 23.8 per cent from the FTSE All-Share (see chart).
Once again, my version of Mr O’Shaughnessy's strategy does not quite replicate the process the US quant maestro laid out in his seminal 1996 book What Works on Wall Street. While Mr O'Shaughnessy based his analysis of the cornerstone growth strategy on 50-stock portfolios, last year I could only find 10 qualifying shares, and this year I am down to nine.
The limited stock diversity means my screen can be considered more risky than the cornerstone growth strategy is intended to be. Nevertheless, over the past four years, high risk has translated into high reward. Even against the backdrop of torrid market conditions over the past 12 months, the screen managed to produce a 6.1 per cent total return compared with a negative 8.7 per cent from the FTSE All-Share. This is the fourth year on the trot this screen has outperformed the market by a decent margin (see table) and even after factoring in a 1.25 per cent charge for the costs involved in reshuffling the portfolio each year the total return stands at a very impressive 113.4 per cent.
| Name | TIDM | Total return (4 Mar 2015 - 24 Feb 2016) |
|---|---|---|
| WH Smith | SMWH | 42% |
| Hilton Foods | HFG | 25% |
| Redrow | RDW | 15% |
| Moss Brothers | MOSB | 6.1% |
| Booker | BOK | 6.1% |
| Porvair | PVAR | 1.0% |
| Lookers | LOOK | -1.3% |
| Savills | SVS | -5.0% |
| Galliford Try | GFRD | -5.6% |
| James Fisher & Son | FSHR | -22% |
| Average | - | 6.1% |
| FTSE All-Share | - | -8.7% |
| Year | FTSE All-Share | O'Shaughnessy growth | Outperformance |
|---|---|---|---|
| 2012 | 14.0% | 25.8% | 10.4% |
| 2013 | 9.3% | 46.5% | 34.0% |
| 2014 | 8.8% | 14.8% | 5.5% |
| 2015 | -8.7% | 6.1% | 16.2% |
Source: Thomson Datastream
Like Mr O’Shaughnessy's value strategy, the growth strategy is based on his observation of what factors tend to be the best predictors of share prices based on 40-year's worth of data. While Mr O'Shaughnessy has changed his approach to identifying 'value' towards using a composite measure (six valuation criteria all rolled up into one), my screen uses his original focus on the price-to-sales ratio (PSR). Mr O'Shaughnessy along with Ken Fisher did much to popularise the use of this valuation ratio. The effectiveness of PSR is often regarded as being based on the fact that the profitability of good companies can temporarily slip leading to substantial price falls as shares follow earnings lower and even experience a de-rating of the earnings-multiple applied to them. However, sales are the ultimate source of profits, and if the fall off in margin proves only temporary, PSR can be a far better indicator of longer-term value than PE.
Calling this screen a 'growth' strategy may seem something of a misnomer given its strong focus on 'value' through the PSR metric. However, the screen also looks for momentum and earnings growth history. The full criteria are:
Value criteria: A price-to-sales (PSR) ratio of 1.5 or less. Growth criteria: Mr O'Shaughnessy demands earnings growth in each of the last five years. Momentum criteria: Mr O'Shaughnessy's original screen was based on selecting the 50 stocks with the best one-year momentum. But since first publishing he has said that shorter periods can also work well. I focus on three-month momentum as there are academic studies that suggest this is optimal for a pure momentum strategy. All stocks have to demonstrate superior three-month momentum to the FTSE All-Share. |
I've provided a taster of the screen results with write ups of the three shares showing the best three-month momentum. Fundamentals relating to these shares along with the other six qualifying shares appear in the table that follows.
VALUE, GROWTH AND MOMENTUM
