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A screen for all seasons

A screen for investment style agnostics
May 16, 2017

There are few things quite like writing a weekly stock-screening column to foster agnosticism on the subject of investment styles. The market can be just as fickle about what investment approaches it rewards and when, as it can be about the stocks and sectors it falls in and out of love with.

Most investors find they have a natural bias regarding what type of investment situations they find particularly attractive, be it growth, value, income or something more exotic. But in reality, there is no one true path when it comes to stockpicking - although, there is often plenty of zealotry on the subject of investment styles. The best course of advice for most investors is simply to find a style of investing that fits with their personality and stick with it. As long as the 'style' in question is based on good stockpicking sense, it's the sticking with it over time that is most likely to create real value. And a prime reason it's considered hugely important that the investment style gels with the investor's personality is that it will be easier to stick by the discipline during bouts of underperformance.

This column would get rather boring were it to pin its colours to the mast of any one style. Instead, a plethora of approaches are considered, including some that are at odds with my own particular predilections. This week's screen attempts to bring together some of the diversity of investment approaches followed by this column into a single portfolio to see if the various styles can balance each other out over time.

My approach has been to assemble a gamut of screens running from those hunting for deep value stocks at one end to hot growth stocks at the other. The screens are ordered in the accompanying table from the raciest (in my opinion) growth approach at the top to deepest value at the bottom. I would also regard the screens as being riskier the further one moves towards the top or bottom of the table and safer based on their stock-selection criteria in the middle (ie the John Neff screen and the Safe Yields screen). That said, all the screens used to make this Screen for All Seasons portfolio have been known to produce some extreme results while I've run them.

The two most growth-focused screens (Great Expectations and Big Reliable) do not use any valuation criteria at all. Instead the Great Expectations screen focuses on share price and earnings upgrade momentum. Meanwhile the Big Reliable screen takes the view that quality is the only worthwhile guide to long-term returns.

The screen based on the style used by fund management legend John Neff looks for growth stocks valued at a reasonable price and showing signs of sustainable growth. It should be noted that my price/earnings (PE) criteria on this screen arguably does not fish as near the bottom of the valuation range as the great Mr Neff himself would have.

The Safe Yield screen looks for attractive and solid dividend yields. It also uses the beta - which measures share price volatility compared with the wider market - as a guide to how reliable stocks may be. The enterprise-value-to-sales screen, which is based on the ideas presented by Ken Fisher in his book Super Stocks, looks for companies with a low value being put on their sales but with historic fundamentals that suggest the low valuation could be a result of a drop-off in returns that may prove temporary. Meanwhile the CAPE screen criteria is based loosely on a contribution from star Schroder manager Nick Kirrage to my recent 'Value Investing Investment Essentials' feature.

I've had to introduce additional filters to each of the screens I've run in order to end up with 10 stocks for each. Where the screen has brought back more than 10 results this filter has been used to reduce the number. Where I've had to relax the screening criteria to get the results up to 10 stocks, the filter has been used to whittle down only those stocks passing on the weakened criteria. Details of the additional filters, along with each screen's other screening criteria and data sources is in the accompanying table.

 

GREAT EXPECTATIONS

■ EPS forecasts for each of the next two financial years upgraded by at least 10 per cent over the preceding 12 months.

■ EPS growth of 10 per cent or more forecast for each of the next two financial years.

■ Share price momentum at least double that of the market over the past year and better than the market over the past six months, three months and one month.

ADDITIONAL FILTER

■ The 10 most attractive shares based on a combined ranking of EPS upgrades and three-month price momentum.

Screen source: Thomson Datastream

BIG RELIABLE

■ EPS growth in each of the past five years.

■ Return on equity (RoE) of 12 per cent or more in each of the past five years.

■ Forecast earnings growth in the current financial year and the year after.

■ Gearing of less than 50 per cent, or net debt of less than two times cash profits.

■ Cash conversion (cash from operations as a proportion of operating profits) of 90 per cent or more.

ADDITIONAL FILTER

■ Ten largest Market Caps

Screen source: S&P Capital IQ

NEFF

■ Historic price/earnings ratio (PE) below the most expensive quarter of shares and above the cheapest quarter.

■ A lower than median average Neff PEG ratio:

Neff PEG is calculated as the price to earnings (PE) ratio divided by EPS growth (an average of the 5-year compound average growth rate and average forecast for the next two year) and historic dividend yield.

Neff PEG = PE / (EPS grth + DY)

■ A five-year EPS compound average growth rate (CAGR) of more than 7.5 per cent but below 20 per cent (excessive growth can fall off).

■ Average forecast EPS growth for the next two financial years of more than 7.5 per cent.

■ Rising EPS in each of the past two half-year periods.

■ Five-year turnover CAGR of 5 per cent or more (in the long term, earnings growth needs to be based on rising sales).

■ Positive free cash flow in each of the past three years.

ADDITIONAL FILTER

■ For stocks passing on weakened criteria the most attractive seven have been selected based on combined ranking of Neff PEG and the EPS growth rate used in the ratio.

NB this portfolio has 11 rather than 10 stocks because two stocks tied for the final spot in the ranking.

Screen source: S&P Capital IQ

SAFE YIELD

■ Dividend yield of at least 3 per cent.

■ Dividend cover of at least two times.

■ Interest cover of at least five times.

■ Dividend growth in each of the past three years.

■ Forecast earnings growth in each of the next two financial years.

■ An average return on equity over the past three years of at least 12.5 per cent.

■ Cash conversion (measured as cash from operations as a percentage of operating profit) of over 100 per cent.

■ A market capitalisation of at least £250m.

■ Beta of 0.75 or less.

ADDITIONAL FILTER

■ For stocks passing on weakened criteria the most attractive eight have been selected based on combined ranking of dividend yield and forecast average EPS growth over the next two financial years.

Screen source: S&P Capital IQ

EV/SALES RECOVERY

■ EV/Sales of less than 1

■ Five-year compound average annual sales growth rate of 7 per cent or more

■ Forecast sales growth in each of the next two financial years.

■ An average operating profit margin of at least 10 per cent over the past five years.

■ Positive free cash flow.

■ Gearing of less than 50 per cent, or net debt of less than two times cash profits.

ADDITIONAL FILTER

■ For stocks passing on weakened criteria the most attractive eight have been selected based on combined ranking of EV-to-sales and historic operating margins.

Screen source: S&P Capital IQ

CAPE SCREEN

■ Market Capitalisation of more than £100m.

■ Net debt less than 2.5 times cash profits.

■ Average 5-year operating cash conversion of more than 100 per cent or average 5-year free cash conversion of more than 90 per cent.

FILTER

■ Top 10 shares out the 50 lowest-CAPE shares are selected based on their combined ranking for CAPE and 5-year average return on capital employed

Screen source: Sharepad

 

61 STOCKS FOR ALL SEASONS

NameTIDMMkt CapPriceFwd NTM PEDY*EV/ SalesNeff PEGP/ BVFwd EPS grth FY+1Fwd EPS grth FY+23-mth MomNet Cash/ Debt(-)Screen
boohoo.com AIM:BOO£2.1bn184p71-6.9-2126%17.1%35%£58mGrt Exp
Jimmy Choo LSE:CHOO£768m203p25-2.55.01.626%10.4%30%-£139mGrt Exp
JD Sports Fashion LSE:JD.£4.3bn444p200.3%1.71.17.816%7.4%25%£214mGrt Exp
Fevertree Drinks AIM:FEVR£1.9bn1,640p630.4%18.413219.1%10.2%23%£27mGrt Exp
Victoria AIM:VCP£478m526p22-1.82.86.545%17.5%18%-£66mGrt Exp
John Menzies LSE:MNZS£566m688p132.7%0.3-4.414%9.0%15%-£65mGrt Exp
Dechra Pharmaceuticals LSE:DPH£1.6bn1,723p281.1%5.88.75.646%9.6%12%-£138mGrt Exp
Electrocomponents LSE:ECM£2.4bn536p272.2%1.87.87.259%4.9%9.1%-£143mGrt Exp
Fenner LSE:FENR£620m320p200.9%1.3-2.075%7.3%2.5%-£145mGrt Exp
Polymetal International LSE:POLY£4.3bn992p133.3%4.31.05.313%17.1%-0.8%-$1.3bnGrt Exp
Persimmon LSE:PSN£7.4bn2,391p115.6%2.10.42.79.0%2.8%20%£913mBig Reliable
NMC Health LSE:NMC£4.4bn2,140p290.5%4.71.56.037%19.8%19%-$431mBig Reliable
Halma LSE:HLMA£4.1bn1,089p261.2%5.13.46.014%9.6%12%-£237mBig Reliable
Abcam AIM:ABC£1.9bn923p331.0%9.73.76.410%22.6%9.9%£77mBig Reliable
Breedon AIM:BREE£1.1bn80p20-2.90.62.419%14.0%9.6%-£159mBig Reliable
WH Smith LSE:SMWH£1.9bn1,768p172.5%1.61.611.48.2%5.9%7.1%-£21mBig Reliable
Diploma LSE:DPLM£1.3bn1,136p241.8%3.23.45.513%4.5%6.5%£11mBig Reliable
Moneysupermarket.comLSE:MONY£1.9bn354p212.8%5.71.110.47.8%9.0%4.2%£45mBig Reliable
Photo-Me International LSE:PHTM£637m169p183.9%2.81.34.719%5.0%2.9%£66mBig Reliable
Whitbread LSE:WTB£7.4bn4,065p162.4%2.71.82.93.5%8.5%0.9%-£901mBig Reliable
Howden Joinery LSE:HWDN£2.9bn472p172.3%2.01.37.5-3.3%7.5%18%£227mNeff
Jupiter Fund Management LSE:JUP£2.2bn481p145.7%5.30.93.513%3.5%16%£337mNeff
PolypipeLSE:PLP£790m399p152.5%2.21.52.88.0%7.8%14%-£169mNeff
Brooks MacdonaldAIM:BRK£302m2,238p211.6%3.41.33.523%13.7%12%£22mNeff
IDOX AIM:IDOX£288m72p161.4%4.31.33.98.0%12.4%7.6%-£25mNeff
Primary Health Properties LSE:PHP£681m114p224.6%20.41.21.412%5.0%5.5%-£697mNeff
British American TobaccoLSE:BATS£90bn5,287p183.2%7.41.512.117%7.3%5.3%-£17bnNeff
Merlin Entertainments LSE:MERL£5.1bn505p231.4%4.21.33.66.9%14.6%4.0%-£1.0bnNeff
Photo-Me International LSE:PHTM£637m169p183.9%2.81.34.719%5.0%2.9%£66mNeff
iomart AIM:IOM£320m298p181.1%4.21.53.716%9.7%-3.9%-£22mNeff
WPP LSE:WPP£21bn1,677p133.4%1.81.22.310%6.2%-9.7%-£4.1bnNeff
Hastings GroupLSE:HSTG£2.0bn309p153.2%3.81.53.744%9.0%35%-£252mSafe Yield
Card Factory LSE:CARD£1.1bn324p167.4%3.1-4.40.1%4.5%31%-£135mSafe Yield
Jupiter Fund Management LSE:JUP£2.2bn481p145.7%5.30.93.513%3.5%16%£337mSafe Yield
FidessaLSE:FDSA£954m2,481p273.7%2.63.95.8-0.8%8.3%9.9%£95mSafe Yield
KellerLSE:KLR£666m925p103.1%0.60.71.619%5.1%9.1%-£308mSafe Yield
British American TobaccoLSE:BATS£90bn5,287p183.2%7.41.512.117%7.3%5.3%-£17bnSafe Yield
Telecom Plus LSE:TEP£974m1,214p214.0%1.43.35.01.7%7.7%1.2%-£36mSafe Yield
Polymetal International LSE:POLY£4.3bn992p133.3%4.31.05.313%17.1%-0.8%-$1.3bnSafe Yield
KCOMLSE:KCOM£451m88p176.8%1.50.75.5-29%-0.4%-3.0%-£46mSafe Yield
WPP LSE:WPP£21bn1,677p133.4%1.81.22.310%6.2%-9.7%-£4.1bnSafe Yield
CostainLSE:COST£496m476p142.7%0.23.25.011%5.9%23%£140mEV/Sales
Robert Walters LSE:RWA£321m450p161.9%0.31.13.113%11.9%20%£23mEV/Sales
Communisis LSE:CMS£111m53p94.6%0.41.30.92.1%4.7%13%-£21mEV/Sales
StafflineAIM:STAF£300m1,170p102.2%0.41.53.61.6%4.7%3.4%-£37mEV/Sales
ImpellamAIM:IPEL£398m790p82.6%0.21.51.6-14%9.5%2.9%-£95mEV/Sales
Vertu Motors AIM:VTU£182m46p72.8%0.10.50.7-2.4%5.1%0.9%£13mEV/Sales
Bloomsbury Publishing LSE:BMY£131m176p153.7%0.92.21.0-23%-3.6%0.3%£9mEV/Sales
KierLSE:KIE£1.3bn1,326p124.9%0.4-2.20.9%10.7%-7.1%-£226mEV/Sales
DraxLSE:DRX£1.3bn322p370.8%0.5-0.6---12%-£94mEV/Sales
Interserve LSE:IRV£349m241p43.4%0.2-1.0-6.5%6.8%-27%-£390mEV/Sales
Sportech LSE:SPO£188m101p22-1.41.61.4-6.0%6.7%8.6%£41mCAPE (9.5)
The Restaurant Group LSE:RTN£657m328p155.3%1.0-3.1-26%4.1%15%-£32mCAPE (8.7)
Northgate LSE:NTG£698m530p113.0%1.71.31.4-2.1%0.9%-2.0%-£359mCAPE (8.6)
LSL Property Services LSE:LSL£210m205p95.0%0.80.21.6-11%7.7%0.1%-£37mCAPE (8.3)
Centrica LSE:CNA£11bn199p126.0%0.60.34.1-2.3%7.6%-12%-£4.5bnCAPE (6.9)
ConnectLSE:CNCT£298m122p77.8%0.21.226-8.6%4.7%-13%-£157mCAPE (6.7)
BHP Billiton LSE:BLT£61bn1,140p113.7%3.0-1.3546%-40.8%-16%-$20bnCAPE (6.6)
Gem DiamondsLSE:GEMD£121m88p12-1.2-1.1-23%62.1%-24%$0mCAPE (5.2)
Hargreaves Services AIM:HSP£103m324p160.7%0.4-0.8268%-32.7%30%-£37mCAPE (3.9)
CPPAIM:CPP£131m15p--1.7-12.9--27%£8mCAPE (2.3)

source: see screen details above