Ten shares for everyone

I’m very pleased to see my Screen for all Seasons picking up the pace. In an alternative universe, one where I work as a fund manager rather than a journalist (probably requiring me to have a full personality transplant among other things) this is the kind of approach I would like to think I’d take. Why? For the simple reason that I’m something of a style agnostic. Through my career I’ve seen many different approaches work and, partly because I’ve had to consider and understand many different investment methods in order to do my job effectively, I’ve developed a respect for them all.

My Screen for all Seasons is designed to be style-agnostic. Essentially, the screen takes the view that different approaches to investing will go in and out of favour and it is hard to predict just when fortunes will change. It combines six different approaches to investing, ranging from a racy momentum and growth approach (the Great Expectations screen), through to a deep value strategy (the CAPE screen). The idea is that all these approaches have merits in the long term, but all can come adrift for protracted periods.

A case in point recently has been the reversal in fortune experienced by growth and value investors. This is something the Screen for all Seasons has really benefited from since I last updated it, with the two value screens it tracks producing truly stunning total returns of 86.0 per cent (EV/Sales) and 61.3 per cent (CAPE). As the accompanying table shows, these were the stand-out performances of the past 12 months when compared with the benchmark I monitor the screen against – a 50:50 split between the FTSE All-Share and Aim, which managed a 36.4 per cent total return. 

Overall, the 60 stocks selected by the six screens last year delivered a 43.2 per cent total return. The cumulative performance over the four years since I started tracking the strategy also looks decent. The screen got off to a disappointing start. But while it underperformed in its first year, the results have steadily improved with the cumulative total return now standing at 39.2 per cent compared with 22.2 per cent from the FTSE All Share/Aim split. While the ideas from the screens in this column are intended as a source for further research rather than off-the-shelf portfolios, if I add in a 1.5 per cent annual charge to represent dealing costs, the total return drops to 31.0 per cent. 

Each of the six screens uses a ranking system to create a selection of 10 stocks. When there are not 10 stocks that meet a screen’s full criteria, a weakened version of the test is employed. Details of any tests failed are given in the accompanying table of stock picks. Full details of the criteria of each screen can be found below along with the ranking methodology. All screens are conducted on all the constituents of the FTSE 350, FTSE All Small and FTSE Aim All-Share. A number of the screens have tests to remove companies below a certain size.

The screens

Great Expectations (Growth and Momentum)

■ EPS forecasts for both the next 12 months and the following 12 month period upgraded by at least 10 per cent over the last year.

■ 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 most attractive stocks have been selected based on a combined ranking of EPS upgrades and three-month price momentum. 

Big Reliable (Quality)

■ 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 

Neff (Growth at a Reasonable Price)

■ 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/earnings (PE) ratio divided by EPS growth (an average of the five-year compound average growth rate and average forecast for the next two years) 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

■ The most attractive stocks have been selected based on combined ranking of Neff PEG and the EPS growth rate used in the ratio.

Safe Yield (Income)

■ 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

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

EV/Sales screen (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

■ The most attractive stocks have been selected based on combined ranking of EV-to-sales and historic operating margins.

CAPE (Deep Value)

■ Market capitalisation of more than £100m.

■ Net debt less than 2.5 times cash profits.

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

Additional filter

■ Top 10 out of the 50 lowest-CAPE shares (excluding shares with suspiciously low CAPEs of 3 or less) are selected based on their combined ranking for CAPE and 5-year average return on capital employed.

CAPE stands for cyclically adjusted PE ratio. It compares share price with average 10 year EPS to try to get an impression of earnings over an entire business cycle.

The stocks

A truly humongous amount of fundamental data can be found in the downloadable excel version of the table:

n.b. NTM = next twelve months / STM = second twelve month period

*foreign FX converted to £

source: FactSet