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What works? Quality not Value

My screen for All Seasons has been disappointing since I began running it two years ago, but it may offer some useful insights into the market's mood
May 28, 2019

My Screen for All Seasons experiment is proving rather disappointing. The idea is to see whether six screens with diverse characteristics can outperform the market with reasonable consistency. While it is very early days (year two), it is fair to say that neither objective is being met.

It is important to point out that the idea behind this screen may simply be duff. Alternatively, it may be a worthwhile endeavour that’s being undermined by poor execution on my part. Both are very possible. However, it is also possible that the performance of the screen says something about how narrow the market’s focus has become over the past few years. Indeed, one interpretation of the screen’s performance over the past year is that buying quality at any price is becoming the only game in town. This chimes with the trends I found when conducting my 2018 stock screen review and more recently my annual Strategy Screen.

The Screen for All Season is based on selecting 10 stocks from six different screens that attempt to mimic distinct investment styles. The standout feature from last year is that only one of the screening strategies delivered a positive performance. The screen in question was the one that was most focused on quality – the Big Reliables screen. The 10 stocks selected by this screen delivered a total return of 12 per cent against a negative 5.8 per cent from a 50:50 split between the FTSE All-Share and Aim All-Share. The average of the six screens was a negative 6.1 per cent. One noteworthy feature of the Big Reliables screen is that it pays no attention whatsoever to valuation. What it looks for is consistent earnings growth, cash conversion, conservative gearing and solid returns on equity.

The other shares that put in an alright showing relative to the market were both focused on growth. But the screens that really came a cropper were value focused. Arguably the most value-focused screen which uses the cyclically adjusted price/earnings ratio (CAPE), put in a particularly ugly performance with a negative total return of 17 per cent. While some of this reflects investors' current tastes and willingness to pay high prices for shares in quality companies, there are also reasons to think the travails of value reflect the high-tech disruption faced by traditional players in a number of industries. It should also be remembered, screening without additional qualitative analysis can be rather crude in its stock selection especially when fishing in out-of-favour waters.

The performance of all six screens from last year can be seen below:

SCREENNameTIDMTotal return (14 May 2018 - 21 May 2019)
GRT EXPSymphony Environmental Technologiessym RI)-67%
GRT EXPAB Dynamicsabdp (RI)149%
GRT EXPEVRAZevr (RI)40%
GRT EXPPlus500 plus (RI)-58%
GRT EXPBurford Capitalbur (RI)0.8%
GRT EXPGriffin Mininggfm (RI)-43%
GRT EXPKeywords Studioskws (RI)-7.3%
GRT EXPFenner fenr (RI)0.2%
GRT EXPParity Grouppty (RI)-44%
GRT EXPFevertree Drinks fevr (RI)-0.6%
GRT EXP---3.2%
BIG RELDCC dcc (RI)-0.2%
BIG RELHalmahlma (RI)42%
BIG RELJD Sports Fashionjd. (RI)61%
BIG RELAbcamabc (RI)12%
BIG RELWH Smith smwh (RI)4.6%
BIG RELBreedon Groupbree (RI)-9.9%
BIG RELMarshallsmslh (RI)63%
BIG RELGB Groupgbg (RI)12%
BIG RELXP Powerxpp (RI)-29%
BIG RELPhoto-Me Internationalphtm (RI)-36%
BIG REL--12%
NEFFMacfarlane Groupmacf (RI)23%
NEFFPageGrouppage (RI)1.5%
NEFFCentral Asia Metalscaml (RI)-17%
NEFFRPC Grouprpc (RI)5.5%
NEFFS&Usus (RI)-16%
NEFFBovis Homes Groupbvs (RI)-9.3%
NEFFSomero Enterprisessom (RI)-5.3%
NEFFParagon Banking Grouppag (RI)-9.4%
NEFFHowden Joinery Grouphwdn (RI)4.5%
NEFFAshtead Groupaht (RI)-7.9%
NEFF---3.1%
SAFE YLDPageGrouppage (RI)1.5%
SAFE YLDLegal & General Group lgen (RI)4.0%
SAFE YLDPlaytechptec (RI)-48%
SAFE YLDTelecom Plustep (RI)45%
SAFE YLDCrest Nicholson Holdingscrst (RI)-16%
SAFE YLDTelford Homestef (RI)-39%
SAFE YLDS&Usus (RI)-16%
SAFE YLDPersimmonpsn (RI)-16%
SAFE YLDPremier Asset Management Grouppam (RI)-16%
SAFE YLDBarratt Developmentsbdev (RI)18%
SAFE YLD---8.3%
EV/SALESDrax Groupdrx RI)-1.0%
EV/SALESDialightdia (RI)-5.6%
EV/SALESDixons Carphonedc. (RI)-41%
EV/SALESPhoenix Groupphnx (RI)2.8%
EV/SALESThe Rank Grouprnk (RI)-3.5%
EV/SALESThe Restaurant Grouprtn (RI)-38%
EV/SALESBloomsbury Publishingbmy (RI)23%
EV/SALESMajestic Winewine (RI)-36%
EV/SALESCharles Taylorctr (RI)-24%
EV/SALESGalliford Trygfrd (RI)-29%
EV/SALES---15%
CAPE (1.8)CPP Groupcpp (RI)-55%
CAPE (3.2)EVRAZevr (RI)40%
CAPE (7)Ferrexpofxpo (RI)-1.0%
CAPE (7)Caledonia Mining Corporationcmcl (RI)-34%
CAPE (6.3)Kakuzikaku (RI)5.6%
CAPE (8.2)Recordrec (RI)-26%
CAPE (9.6)LSL Property Serviceslsl (RI)-8.1%
CAPE (0.1)Impellam Groupipel (RI)-16%
CAPE (8)Anglo Americanaal (RI)10%
CAPE (5.4)Centricacna (RI)-29%
CAPE (8.7)Low & Bonarlwb RI)-78%
CAPE---17%
FTSE All-Share ---1.2%
FTSE Aim All-Share---10%
FTSE All-Share/Aim---5.8%
Screens for all seasons---6.1%

Source: Thomson Datastream

The broad message from the Screen for All Seasons would seem to be the market mood is to buy quality at any price. Growth-focused styles are likely to benefit, too, because quality companies generally offer good growth. Meanwhile, value investing seems very out of favour as a style. But looking to the future, investors may be wise to bear in mind is that while style trends can persist for some time, the music inevitably changes at some point. That could prove a particularly important consideration just now, given there seems to have been a pronounced narrowing of the market’s focus around the quality theme.

Following a less-than-inspiring turn last year, which followed a poor first outing, the screen boast an is-it-really-worth-the-effort total return of 0.6 per cent compared with 2.4 per cent from a split between the FTSE All-Share and Aim All-Share. If I add in a 1.5 per cent charge to account for notional dealing costs (the screens run in this column are presented as a source of ideas for further research rather than off-the-shelf portfolios) the total return from the Screen for All Season is a negative 2.4 per cent.

The criteria for the six screens are explained below along with the additional filters used to choose the top 10 shares from each screen. When fewer than 10 stocks pass all of a screen's tests, the number of results are boosted with stocks that pass all but one test. The results from all the screens along with some fundamentals relating to the stocks can be found in the accompanying table.

 

The screens

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

Screen source: S&P CapitalIQ

 

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/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.

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

■ 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.

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

■ The most attractive stocks 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 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.

Screen source: Sharepad

 

The stocks

ScreenNameTIDMMkt capPrice Fwd NTM PEDYNeff PEGEV/salesRoEFwd EPS grth FY+1Fwd EPS grth FY+23-month upgrade/downgrade3-month momentumNet cash/debt (-)*Net debt/Ebitda
GRT EXPAB Dynamics PlcAIM:ABDP£525m2,670p490.1%2.01127%43%14%13%74%£19m-
GRT EXPGamma Communications plcAIM:GAMA£1.1bn1,130p320.8%1.83.626%17%12%1.4%35%£31m-
GRT EXPWater Intelligence plcAIM:WATR£51m350p30-2.82.514%25%11%7.4%14%£2m-
GRT EXPRobinson plcAIM:RBN£14m86p106.4%0.70.73.0%152%-5.4%35%30%-£9m2.7
GRT EXPAugean plcAIM:AUG£111m107p11-0.81.315%19%1.9%11%28%£8m-
GRT EXPSoftcat plcLSE:SCT£1.8bn933p283.0%4.21.583%14%5.6%-25%£53m-
GRT EXPDewhurst PLCAIM:DWHT£74m1,125p161.1%0.81.212%37%2.2%-25%£9m-
GRT EXPJD Sports Fashion plcLSE:JD.£6.0bn611p190.3%0.91.228%15%9.4%4.8%29%£125m-
GRT EXPGreggs plcLSE:GRG£2.1bn2,090p241.7%1.62.021%22%5.3%11%19%£88m-
GRT EXPSanderson Group plcAIM:SND£69m115p142.6%1.71.911%6.7%12%0.7%17%£3m-
BIG RELCompass Group PLCLSE:CPG£29bn1,817p212.1%1.51.446%7.7%6.3%-4.8%-£3.7bn1.6
BIG RELCarnival plcLSE:CCL£27bn3,948p114.0%0.52.413%7.2%13%--9.6%-£8.2bn2.0
BIG RELDCC plcLSE:DCC£6.7bn6,820p182.0%2.20.513%4.0%3.7%-0.3%3.5%-£230m0.4
BIG RELHalma plcLSE:HLMA£6.9bn1,808p340.8%3.46.120%12%7.9%-0.4%20%-£195m0.7
BIG RELJD Sports Fashion plcLSE:JD.£6.0bn611p190.3%0.91.228%15%9.4%4.8%29%£125m-
BIG RELHomeServe plcLSE:HSV£4.0bn1,217p301.8%1.14.319%8.4%8.1%0.7%25%-£305m1.6
BIG RELboohoo group plcAIM:BOO£2.7bn234p46-6.33.020%21%21%-0.6%37%£191m-
BIG RELMoneysupermarket.com Group PLCLSE:MONY£2.0bn367p203.0%1.45.547%5.5%8.1%-0.1%11%£30m-
BIG RELMarshalls plcLSE:MSLH£1.3bn661p231.8%1.22.720%8.8%5.9%3.2%25%-£37m0.5
BIG RELBreedon Group plcAIM:BREE£1.3bn75p15-0.91.810%8.7%11%0.5%14%-£311m2.0
NEFFMacfarlane Group PLCLSE:MACF£165m105p132.2%1.00.815%40%1.8%2.2%16%-£13m0.8
NEFFPageGroup plcLSE:PAGE£1.6bn517p145.0%0.81.035%14%9.3%0.8%15%£98m-
NEFFRobert Walters plcLSE:RWA£465m650p132.3%0.50.326%10%6.7%2.8%20%£74m-
NEFFMarshalls plcLSE:MSLH£1.3bn661p231.8%1.22.720%8.8%5.9%3.2%25%-£37m0.5
NEFFGrafton Group plcLSE:GFTU£2.1bn877p132.1%1.00.712%0.6%7.7%5.4%14%-£53m0.2
NEFFUnilever PLCLSE:ULVR£126bn4,839p212.8%1.03.274%7.9%8.4%-17%-£19bn1.5
NEFFMJ Gleeson plcLSE:GLE£478m876p153.7%0.81.920%8.1%10%0.0%13%£28m-
NEFFElectrocomponents plcLSE:ECM£2.8bn630p162.3%1.31.528%9.7%6.6%3.6%11%-£124m0.5
NEFFPrimary Health Properties PlcLSE:PHP£1.5bn132p234.2%1.02711%9.8%5.9%1.3%10%-£688m0.0
NEFFParagon Banking Group PLCLSE:PAG£1.1bn440p84.4%0.60.013%6.5%7.8%-3.0%-£5.7bn-
SAFE YLDVp plcLSE:VP.£282m714p73.6%0.71.317%16%6.0%--31%-£188m2.0
SAFE YLDStaffline Group plcAIM:STAF£86m321p38.3%0.20.125%0.3%9.3%--54%-£37m0.9
SAFE YLDSirius Real Estate LimitedLSE:SRE£659m65p184.5%-1316%8.1%11%-28%4.0%-£288m6.6
SAFE YLDThe Character Group plcAIM:CCT£119m568p124.6%0.50.946%6.6%11%-0.6%3.5%£20m-
SAFE YLDPolymetal International plcLSE:POLY£3.9bn824p94.6%-3.826%9.9%6.1%-0.2%-7.4%-£1.2bn2.1
SAFE YLDTBC Bank Group PLCLSE:TBCG£912m1,662p63.4%0.30.022%15%9.2%-13%-£442m-
SAFE YLDCarnival plcLSE:CCL£27bn3,948p114.0%0.52.413%7.2%13%--9.6%-£8.2bn2.0
SAFE YLDTelecom Plus PLCLSE:TEP£1.1bn1,434p253.6%4.81.414%6.1%9.2%-1.1%4.5%-£17m0.3
SAFE YLDDomino's Pizza Group plcLSE:DOM£1.1bn232p144.1%1.22.4131%4.0%8.0%-6.2%-3.7%-£203m2.0
SAFE YLDVesuvius plcLSE:VSVS£1.4bn509p103.9%1.00.913%3.3%7.5%-1.9%-15%-£248m1.1
EV/SALESTaptica International LtdAIM:TAP£180m140p44.4%0.50.623%-16%6.8%-14%-23%£43m-
EV/SALESSuperdry PlcLSE:SDRY£399m487p106.4%2.80.416%-46%0.8%-13%-6.5%£19m-
EV/SALESRedrow plcLSE:RDW£1.9bn550p65.5%0.30.922%2.9%4.0%-2.1%-11%£101m-
EV/SALESPets at Home Group PlcLSE:PETS£878m176p134.3%-1.03.4%-2.1%2.0%0.1%24%-£119m1.3
EV/SALESWilliam Hill plcLSE:WMH£1.2bn133p149.0%-0.8--52%32%-18%-28%-£209m0.8
EV/SALESMaintel Holdings PlcAIM:MAI£69m485p67.1%4.30.78.8%18%5.7%-0.9%-7.0%-£25m2.2
EV/SALESFlowtech Fluidpower plcAIM:FLO£82m135p94.5%-0.96.1%30%5.9%-2.2%20%-£20m1.7
EV/SALESSportech PLCLSE:SPO£52m28p23--0.5-304%-11%-20%-21%£18m-
EV/SALESCharles Taylor plcLSE:CTR£169m220p85.3%-0.3-3.3%6.6%5.3%1.9%£87m-
EV/SALESHenry Boot PLCLSE:BOOT£329m248p93.6%0.50.914%-0.2%2.3%2.1%-4.0%-£18m0.3
CAPE (5.4)Arricano Real Estate PLCAIM:ARO£43m41p--0.04.852%---0.0%-£78m4.7
CAPE (5.4)Caledonia Mining Corporation PlcAIM:CMCL£45m435p---0.826%-43%19%-29%-2.0%£7m-
CAPE (5.5)Kakuzi PlcLSE:KAKU£45m93p--0.01.411%---0.0%£12m-
CAPE (4)Petrofac LimitedLSE:PFC£1.3bn398p67.5%-1.80.46.2%-14%-2.6%4.6%0.3%-£283m0.6
CAPE (3.6)iomart Group plcAIM:IOM£379m349p182.8%2.94.112%6.0%7.9%-0.9%-5.9%-£33m0.8
CAPE (7.6)Plus500 Ltd.LSE:PLUS£700m617p626%0.10.0150%-63%-3.6%-24%-20%£247m-
CAPE (6.4)KAZ Minerals PLCLSE:KAZ£2.5bn522p61.8%0.22.450%-3.8%9.0%2.0%-22%-£1.6bn1.8
CAPE (5.4)William Hill plcLSE:WMH£1.2bn133p149.0%-0.8--52%32%-18%-28%-£209m0.8
CAPE (7.4)XLMedia PLCAIM:XLM£105m50p511%0.60.815%-3.2%4.8%-17%-37%£32m-
CAPE (4)DCC plcLSE:DCC£6.7bn6,820p182.0%2.20.513%4.0%3.7%-0.3%3.5%-£230m0.4

Source: S&P CapitalIQ

All foreign FX converted to £