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Stock Screen Review 2021: the final curtain!

I’ll be hanging up my stock-screening boots early next year... but you don’t get rid of me that easily!
Stock Screen Review 2021: the final curtain!
  • Goodbye, it's been fun!
  • My digital soul lives on in the IC metaverse (a rusty old laptop).
  • The screens are coming of age with several 10-year track records.

This article marks the final curtain for my stock-screen reviews. But it is not the end of the stock-screen reviews. That’s to say, next year I’ll be leaving the Investors’ Chronicle but my screens will doggedly stay around. 

The world's greatest entrepreneurs have long looked to technology to secure their legacy and immortality. Their cunning ruses to outstay their welcomes range from cryogenic freezing to dreams of uploading a digital copy of the soul to the metaverse. I’ve taken a cue from these vainglorious pursuits. Long ago I embedded the essence of Algy Hall into a suitably-robust technological platform. Perhaps it is fair to say the platform in question is one more within the reach of a person of a slightly more diminutive standing (ahem!) to the Elons and Bezoses of this world. 

Microsoft Excel, prey give my screens immortality on the pages of the Investors’ Chronicle!

In fact, I’m sure my colleague Alex Newman, who will take over writing the stock screening column, will be able to do much to improve as well as use my screens as he bravely enters the byzantine world of spreadsheets, data downloads and logic formulas I’ve constructed. And hopefully the screens will continue to provide real value and insight to Investors’ Chronicle readers. The performance numbers from this year’s review certainly suggest they have produced a fair share of good ideas since I began to follow them, which in many cases was 10 years or more ago.

I’ve been lucky enough to have a decent chunk of time to reflect on these screens this year. While on sabbatical in October, I wrote a book on some of the lessons I’ve learned about screening while writing the column and the stories behind four key market-beating strategies. The book itself should see the light of day next summer. 

But, for now, the big question is how the screens have performed over both the short and long term. The table at the end of the article provides all the data.


I like it

One of the things I found myself most pleased with when reflecting on the last decade was not the best performing of the screens. Rather it was the performance of one of the least likely winners. My Contrarian Value screen has delivered strong outperformance over a decade despite conventional value investing strategies taking a bath. True, the journey has not been smooth. Still, I think the numbers are impressive. And I think a key reason for the screen bucking the wider trend for 'value' may be that while it encapsulates the key principle behind value investing (reversion to the mean) it uses a valuation measure that is not affected by problematic accounting rules related to intangible assets.

I’ve written extensively this year about the problems caused for many popular valuation and quality ratios by intangible accounting rules. Intangible investments include things such as software development, brand building and drug discovery. The kind of things the most successful businesses in the modern world are built on. Put succinctly, the problem users of company accounts face is that accounting standards force intangible-intensive companies to understate both profits and the size of their balance sheet. 

Another one of the screens I follow that dodges many of the issues associated with intangibles accounting rules is the cash-focused version of Joel Greenblatt’s famous earnings-focused Magic Formula screen. Unlike the income statement and balance sheet, the cash-flow statement is not distorted by intangibles accounting rules. 

The difference in performance between the cash-focused and earnings-focused versions of the screen may also suggest that investors benefit from trying to circumvent the issues created by intangibles. My Cash Magic screen boasts index outperformance based on CAGR of 9.1 per cent compared with 3.1 per cent for the Magic Formula screen. 

The fact these screens are only conducted once a year and have relatively short histories (a decade is not really that long in the scheme of things) means drawing this kind of inference is far from 'scientific' or rigorous. So, much of this difference could come down to luck. But given the very real nature of the accounting problem, the divergence is worth paying some attention to as it could be telling us something important about how investors should consider fundamental data. 


The market likes it

The standout winner from my screens over the last decade has been my High Quality Large Cap screen (see graph). This should not come as a big surprise. 'Quality' has been the dish of the decade for investors. In fact, if the screen was not strutting its stuff at the top of the leaderboard it would probably suggest I’d  done a poor job in putting it together. 

In terms of doing a poor job, a case in point is the small-cap version of the screen. As an experiment, when I changed the criteria of the large-cap screen to adjust for the fact that its valuation criteria had started to look out of place, I left the small-cap screen unaltered. While the small cap criteria has now been changed, a few poor years while I waited to bring it into line with the large cap screen have left its performance languishing toward the bottom of the performance table. 

The alternation to screening criteria in question was a decision to remove any serious valuation requirements. This has been necessary for the quality screens because the price tag attached to quality stocks has risen substantially over the last 10 years. Indeed, since I first ran the High Quality Large Cap screen the market as a whole has re-rated 52 per cent based on a next 12 month price/earnings valuation. This partly reflects a recovery from the credit crunch bear market. The re-rating of five stocks originally selected by the screen has been more than three times that of the market. On aggregate, those five stocks have re-rated by148 per cent. 

For me, this underlines the fact that valuation risk is an increasingly important consideration for investors in quality companies. High valuations tend to mean relatively small disappointments can lead to big losses.

The other type of screen that has been particularly suited to the market’s mood over the last 10 years are those that look for growth and momentum. Despite having had a dire past 12 months, the Great Expectations screen is the standout example of this. This screen looks for very strong price-momentum, coupled with strong forecast earnings growth and significant forecast upgrades. 

Interestingly, the rise of intangible investments could be feeding into the success of this screen, too. One of the characteristics of intangible investments is that they either often fail outright to create value or win very big. For example, investment in drug development could result in complete failure or a potential multi-billion dollar blockbuster. The scale and longevity of successes can drive persistent forecast upgrades and share price momentum. 


Don't ignore it

Another type of screen that has really distinguished itself over the last 10 years are my dividend-focused screens. I’m not much of a fan of the idea of income investing. Investors build wealth through total returns. How share price gains and dividends make up the total return mix is largely by-the-by. What’s more, paying dividends is ultimately a sign that a company has nothing better to do with its surplus cash.

However, a strong dividend record can point to a stable, conservatively-run business. A decent yield can also suggest a company is being overlooked. Given the fact such companies will by definition be sacrificing the opportunity to invest cash in growth in order to pay a dividend, the reason the market overlooks such businesses may be because they seems dull. But dull-and-steady is often a potent mix for driving long-term stock market returns. 

My Low Risk High Yield, Safe Yields and High Yield Small Cap screens all attempt to profit from this strategy. The emphasis on 'high yield' in the names of the screens perhaps a bit misplaced. The bar set for dividend yields by the screens is actually pretty low. But the outperformance of the screens over the years, especially seen in light of disappointing showings from high-yield income funds, suggests this is a case of less is more. 


Cut it

Having taken a sabbatical during 2021, I haven’t been able to run as many screens as I normally would in a year. I’ve therefore taken the opportunity to simply cut a few screens. This has not simply been done based on those that have performed poorly, although it has been a consideration. Rather, the screens I have cut have to my mind been, on reflection, poorly conceived. 

They are ones that were thin on criteria and therefore imbalance, as in the case of my ZEUS screen. Or I’ve become increasingly annoyed by the quality of data they run off, such as with my Free Cash Flow Kings screen. I also run other screens that have similar objectives, but im my opinion, use better criteria.

I have, however, stuck with poorly performing screens which I think are based on genuinely interesting ideas. One such screen is the Small Caps on Steroids screen. This turns conventional wisdom about value investing on its head by looking for value shares with lots of debt. Normally value investors look for a margin of safety, which tends to mean a strong balance sheet. 

The cull that has taken place should provide my successor with a bit of space to start putting his own stamp on the column, which I think is an excellent idea. 

Anyway, here’s how all the screens have done over the last year and since I started to cover them for the Investors’ Chronicle. It’s been great fun!


ScreenIndexYears runCAGR out/under performance since incept.CAGR since inceptionSince inception10yr5yr3yr1yr
High-Quality Large CapsFTSE All Share10.310.8%20% vs 8.2%547% vs 125%483% vs 109%148% vs 36%80% vs 23%29% vs 17%
Cash MagicFTSE All Share8.69.1%16% vs 6.0%248% vs 65%-63% vs 36%60% vs 23%43% vs 17%
Low-Risk, High-YieldFTSE All Share10.78.9%16% vs 6.7%400% vs 100%343% vs 109%113% vs 36%62% vs 23%24% vs 17%
Great ExpectationsFTSE 35010.08.4%17% vs 7.9%379% vs 114%-67% vs 35%29% vs 22%-15% vs 16%
Monsters of MomentumFTSE All Share11.18.2%15% vs 6.7%394% vs 105%394% vs 109%107% vs 36%73% vs 23%19% vs 17%
High Yield Small CapsFTSE Small Cap/Aim9.17.3%18% vs 10.4%362% vs 145%-89% vs 66%63% vs 44%44% vs 19%
Slater PEGFTSE Small Cap/Aim8.57.1%17% vs 9.4%283% vs 115%-141% vs 65%54% vs 43%14% vs 19%
Contrarian Value Top 5FTSE All Share10.46.7%14% vs 6.9%289% vs 99%413% vs 109%53% vs 36%41% vs 23%1% vs 17%
O'Shaughnessy GrowthFTSE All Share9.86.6%14% vs 7.1%266% vs 96%-63% vs 36%55% vs 23%30% vs 17%
Genuine GrowthFTSE All Share/Aim 1009.15.7%14% vs 8.1%237% vs 103%-67% vs 49%70% vs 26%4% vs 13%
Safe YieldsFTSE All Share10.45.2%12% vs 6.8%236% vs 98%238% vs 109%53% vs 36%50% vs 23%24% vs 17%
Strat ScreenFTSE All Share8.85.1%12% vs 6.5%170% vs 74%-30% vs 36%36% vs 23%6.3% vs 17%
Have-It-AllFTSE All Share10.04.6%13% vs 7.8%231% vs 112%231% vs 112%46% vs 36%39% vs 23%21% vs 17%
Cheap Small CapsFTSE Small Cap/Aim8.74.0%13% vs 9.1%200% vs 114%-122% vs 65%89% vs 44%47% vs 19%
Big ReliableFTSE All Share10.63.6%10% vs 6.6%186% vs 96%185% vs 107%117% vs 36%57% vs 23%20% vs 17%
Peter Lynch StalwartsFTSE All Share9.63.4%11% vs 7.5%178% vs 101%-71% vs 36%43% vs 23%20% vs 17%
Magic FormulaFTSE All Share10.93.1%10% vs 6.6%181% vs 101%169% vs 109%37% vs 36%20% vs 23%26% vs 17%
O'Shaughnessy ValueFTSE35010.83.0%9.5% vs 6.3%166% vs 93%185% vs 105%41% vs 35%41% vs 22%35% vs 16%
NeffFTSE All Share9.92.9%11% vs 7.5%171% vs 104%-6% vs 36%7% vs 23%10% vs 17%
Genuine Value Sm. CapsFTSE Small/Aim8.62.8%12% vs 9.0%165% vs 109%-67% vs 65%50% vs 44%24% vs 19%
Best of Brit Top 5Best of British10.22.8%16% vs 13%361% vs 249%345% vs 258%73% vs 73%73% vs 69%15% vs 26%
Inflation BustersFTSE 350  9.92.4%10% vs 7.1%149% vs 97%-54% vs 35%18% vs 22%17% vs 16%
DremanFTSE All Share8.61.9%8.1% vs 6.1%96% vs 67%-38% vs 36%43% vs 23%29% vs 17%
High-Quality Small CapsFTSE Small Cap/Aim9.31.5%12% vs 10%193% vs 154%-35% vs 65%15% vs 44%10% vs 19%
Genuine ValueFTSE All Share8.80.0%6.2% vs 6.2%69% vs 69%-18% vs 36%12% vs 23%17% vs 17%
Late BloomersFTSE All Share7.6-0.6%4.9% vs 5.5%43% vs 50%-39% vs 36%14% vs 23%7.4% vs 17%
Small Caps on SteroidsFTSE Small/Aim3.2-1.0%6.6% vs 7.7%23% vs 27%--14% vs 44%6% vs 19%

All performance data based on total return (share price and dividends reinvested) to 7 Dec 2021

CAGR = compound annual growth rate

Source: Thomson Datastream