Q2 for the value strategies have been a disappointment for the most part.
Q1 was strong, but the value strategies that I follow weren’t able to keep up in the second quarter.
At the end of the first quarter, 9 out of the 16 stock screens (60%) were beating the market. That is now down to 5 out of 16 screens beating the S&P500 for a win rate of 31.3%.
Here’s how all the value screens did last year.
The order is sorted in descending order based on the end of year performance.
But first, something important that most people get confused about.
The value stock screens are predefined results free for visitors.
It is not part of the Stock Analyzer package. The Stock Analysis software is a “stock analyzer” providing deep fundamental analysis and valuations.
It does not screen for stocks or perform backtests.
Just share this post to download a printable PDF of this post for you to keep forever!
Now that I’ve gotten that clear, let’s continue.
The Value Stock Screener Performances
You can read up on the idea behind each screen and how it was backtested from the main stock screener page.
Compare last years performance with the Q1 and Q2 performance of 2014 below (descending order).
Now here are the Q1 and Q2 performances side by side, sorted by the Q2 numbers.
The Altman Z screen was at the bottom in terms of performance last year (still gained 27%), so it’s good to see it at the top. It also goes to show that one strategy won’t work every single year.
All those claims you see on the internet are mostly lies.
So expect periods of underperformance even with the screens that I have up. And that’s the difficult part with mechanical investment strategies because it’s difficult to know whether your starting point will be a good time or not.
A leap of faith and trust in the numbers and research is required to stick to the strategy.
I should really try combining the Piotroski Best and the FCF Cow screen to see what I come up with.
What do you think?
What two screens should I try combining?
Quick Recap of the Stock Screen Descriptions
Before I go further, let me give you a quick run down of what strategy each screen follows.
- Screens for stocks with an Altman Z score > 3. Some people say that the Altman Z score is useless now, but if you understand the components of the Altman Z, you’ll appreciate how deep it is.
- Screen based on the 3 best performing criteria from the Piotroski Score.
- Looks for increasing FCF from the previous year along with inproving FCF/LongTermDebt to find strong companies.
- Seeks out companies with increasing net net working capital. Sign of balance sheet strength.
- Finding stocks with strong earnings yield and return on capital. The Magic Formula does work.
- Searching for stocks where the Graham Formula is less than 66% of the stock price. Looking for a big margin of safety here.
- Strategy that follows insider buy and sell transactions. Also include stock options in this screen.
- Just replicating the original Piotroski score and all the stocks with a score of 9.
- One of my top 10 ratios which I use to find strong companies with great management.
- Much like the insider buys screen but uses company share buybacks as signals.
- Companies are being priced with zero growth. Stocks between 7 and 8.5.
- Based on Graham’s 10 stock criteria with the best performing criteria.
NNWC & NCAV
- Best performing strategy since I started following each one closely. Not for the faint hearted.
- Another category of cheap companies stockpiled with cash.
A Deeper Look at the Altman Z Stocks
There are some claims that the Altman Z is outdated and shouldn’t be used in this day and age.
Take a look though.
Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 +1 X5
X1 = Working Capital / Total Assets
X2 = Retained Earnings / Total Assets
X3 = EBITDA / Total Assets
X4 = Market Value of Equity / Total Liabilities
X5 = Net Sales / Total Assets
Here are the rules for interpreting the Altman Z score.
- When Z is >= 3.0, the firm is most likely safe based on the financial data.
- When Z is 2.7 to 3.0, the company is probably safe from bankruptcy, but this is in the grey area and caution should be taken.
- When Z is 1.8 to 2.7, the company is likely to be bankrupt within 2 years.
- When Z is <= 1.8, the company is highly likely to be bankrupt.
The Z score itself isn’t as accurate today.
But the ratios (X1 to X5) are useful financial ratios. You can read about each in more detail and how it is used from the Altman Z discussion article.
The Current 2014 Altman Z Portfolio
Here are the stocks that make up the 2014 Altman Z Screen.
All stocks are held for one year with equal weighting.
Even if I believe a stock has reached intrinsic value, it stays. No sells.
The purpose is to keep it objective with minimal expenses.