10 shares for investors of all stripes

The idea behind my Screen for All Seasons, which I began to monitor just three years ago, is that it amalgamates six different screens, all of which embody a distinct approach to stockpicking. My interest in doing this (and very hopefully it is of interest to readers, too) is to see how well a broad spread of investment approaches can balance each other out while trying to produce better returns than the market. As always, though, on a practical level this screen provides many stock ideas for further research. 

The surprise winner from last year’s screens was one focused on the cyclically adjusted price/earnings (CAPE) ratio. Each screen selects 10 stocks based on the criteria set out below. The CAPE ratio compares stock prices to average earnings over the past 10 years. The idea here is that for cyclical companies investors often pay too much attention to the near-term outlook without appreciating where earnings are in the cycle. The real strength of this approach was that it highlighted two gold miners that have seen their shares soar in the past 12 months. 

The events that have led to gold’s surge were largely unpredictable, but deep value approaches often have to treat mean reversion (earnings tracking up or down to the average) as an article of faith because to buy deep value stocks usually requires piling in despite seemingly awful prospects. However, it is also of note that another value strategy, based on buying companies valued at a low multiple of sales, also managed impressive outperformance. It was perhaps more predictable that strategies based on momentum and growth (Great Expectations and Big Reliables) managed to do well. 

12-month performance

Source: Thomson Datastream

While performance in absolute terms from the screen was unsurprisingly poor given what has been going on in the market, in relative terms the 8 per cent outperformance was good. This follows a disappointing outing in this screen’s first year (3 per cent underperformance) and performance in line with the market last year. The cumulative total return from the screen now stands at a negative 6.2 per cent compared with negative 11.7 per cent from the market – taken to be a 50:50 FTSE All-Share/Aim split. While these screens are meant to provide ideas for further research rather than off-the-shelf portfolios, if I factor in an annual 1.5 per cent annual charge to reflect notional dealing costs the negative return widens to 10.3 per cent.

Source: Thomson Datastream

All the screen results are presented in the tables below, along with fundamental data. The criteria used to select stocks is weakened when not enough positive results come back by allowing certain tests to be failed. In order to get a 10-stock selection, an additional filter is used by each screen to produce a ranking from which the top 10 are chosen.

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.

Source: S&P CapitalIQ