Earlier this year when I updated the large-cap version of my genuine value screen, I attempted to make an improvement to hone its focus on growth companies. The change is one that I am also applying to the small-cap version of the screen this week.
The change in question requires the screen to take account of recent revisions to brokers’ EPS forecasts. This screen previously only used forecast EPS growth and share price momentum as an indicator of sentiment and prospects. Given this strategy uses a valuation measure that focuses on earnings growth, looking at whether brokers are becoming keener on companies’ earnings prospects seems to fit with the overarching logic. Indeed, if earnings forecasts have been falling, the valuation metric used by this screen may be presenting a rose-tinted view, while the reverse may be true if forecasts have been rising.
My hope would be that the change will reduce the proportion of shares picked that come a cropper. This has been an issue for the screen over the last year when three of the 22 shares selected a year ago delivered a negative total return of more than 70 per cent. Even with about 60 per cent of the shares picked by the screen outperforming the index, overall the screen underperformed, delivering a 7.4 per cent total return compared with 12.7 per cent from a 50:50 split between the FTSE Small Cap and FTSE Aim All-Share.