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A Warren Buffett screen
Warren Buffett is considered the world's most successful investor, due to the consistent market-beating returns he has achieved for his Berkshire Hathaway investment company. He screens for companies that have a monopoly position and strong pricing power, to ensure consistent profits, but where there is significant unrecognized value. Read More
Warren Buffett is arguably the most successful living investor, delivering consistently market-beating profits for investors in his Berkshire Hathaway group. Even after a 9.6 per cent fall in 2008, book value per share in Berkshire Hathaway has grown at a compounded annual rate of 20.3 per cent over the past 44 calendar years. So, $19 invested in Berkshire in January 1968 would be worth $70,530 today.
Encouragingly, Buffett's approach to investing contains elements of stock screening, and screens based on his ideas seem to work. Analysts at S&P, in conjunction with Business Week, have been running a Buffett stock screen since February 1995 which, by January 2008, had produced an annualized return of 14.9 per cent, compared with 8.2 per cent for the S&P 500.
However, because he doesn't disclose his precise investment criteria, or likely investment targets, it is left to other writers to interpret the gospel according to Buffett. Books such as the bestseller The Warren Buffett Way: Investment Strategies of the World's Greatest Investor, by Robert Hagstrom, spell out the classic Buffett philosophy - take your time to find the right stock, use painstaking research and screening, and then stick with the share until its intrinsic value is realised. Buffett's approach is: "Buy great companies not great stocks" - that means you should approach buying a single share as if you were buying the entire business.
So any stock screen based on his approach needs to screen out what he calls 'commodity based' companies - where price is everything, brand loyalty is weak, and profit margins and return on equity are low. It needs to identify the consumer monopolies that are Buffett's forte - companies with significant pricing power, partly through strong brand recognition, and with significant unrecognised value. Hide Details
A Ben Graham value investing screen
Ben Graham is considered the father of 'value investing' - a strategy of screening for companies whose share prices do not reflect their asset backing and dividend streams. He believed that a bargain share is one where net current assets less all prior obligations exceeds the market value of the company by at least 50 per cent. Read More
Ben Graham is regarded as one of the greatest investment theorists and the father of 'value investing'. He outlined his approach in the 1949 book The Intelligent Investor, which was updated in collaboration with Warren Buffett - one of his most famous students - in 1973. At the heart of his theory is the idea that companies whose share prices do not reflect their asset backing and dividend streams must eventually rise in price as the market comes to recognise their intrinsic 'value'.
As he put it: "If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamourous for some other reason, it is logical to expect that it will undervalue - relatively, at least - companies that are out of favour because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should be both conservative and promising."
His text-book approach is balance-sheet-based and concerns the net current assets - stocks, debtors and cash less any creditors - of a company. Graham believed that a bargain share is one where net current assets less all prior obligations - such as creditors falling due after one year, deferred taxation and provisions for liabilities and other charges - exceeds the market value of the company by at least 50 per cent. This means that fixed assets, such as property, machinery, goodwill etc, are in the price for nothing.
So a Ben Graham 'value investing' stock screen can be carried out using the current ratio and the price to book value. Graham said the current ratio, of current assets to liabilities, must be at least two - in other words, current assets must be at least twice as large as current debts. He also looked for a share price that is not more than 1.5 times book value per share, where book value is measured as total assets minus intangible assets and liabilities, and an interrupted history of profits and dividend payments.
The Investors Chronicle Bargain Portfolio, based on a Ben Graham stock screen, has outperformed the FTSE All-Share index in nine of the past ten years. Hide Details
A 'growth at a reasonable price' screen
Jim Slater is one of the UK's best known investors and financial writers, who has developed a style somewhere in between out-and-out growth investing and the more conservative asset-based approach of classic value investors. He puts most emphasis on the consistency of a company's earnings growth. Read More
Jim Slater, one of the UK's best known investors and financial writers, spelt out his 'growth at a reasonable price' philosophy in the book "Beyond the Zulu Principle: Extraordinary Profits from Growth Shares". It's a philosophy that was borne of, and lends itself to, stock screening. In fact, Slater's enthusiasm for screening led him to set up the Company REFS information system - used by many investors to manually screen the UK stock market before the advent of online tools.
Slater's style is somewhere in between out-and-out growth investing and the more conservative asset-based approach of classic value investors. His key measure is the price to earnings growth (PEG) factor - the price/earnings (P/E) ratio divided by the earnings per share (EPS) growth rate. He believes it is a clear indicator of reasonably priced growth. As he writes in the guide to his REFs system: "The PEG is a much more sophisticated measure [than the price/earnings ratio] because it relates the price/earnings ratio of a company to its future earnings growth rate, and gives a better indication of value." Slater believes that "over the long term, it has paid to buy the market on a PEG of one or below".
But he puts most emphasis on the consistency of earnings growth. He wants to see at least four consecutive years of EPS growth and profitability in the past 5 years. He also wants to see forecasts for expected earnings growth in future years, from preferably more than broker.
To these criteria, he then adds some measures borrowed from traditional value investing: current ratio, gearing, return on capital employed.
Before he will invest, though, Slater wants some evidence that the cheap growth stocks identified by his stock screen is benefiting from share price momentum. This can be found by looking for shares that have outperformed the market over one year. Hide Details
A Martin Zweig screen
US investor Martin Zweig has delivered consistently above average returns by screening for companies that have achieved 'reasonable gains in sales and earnings'. A stock screen based on his approach, run by the American Association of Individual Investors has delivered cumulative gains of over 1,329.8 per cent between January 1998 to the end of April 2009. Read More
Martin Zweig is widely regarded in the US as one of the greatest stock pickers of all time and his easy-to-replicate approach, detailed in his book "Winning on Wall Street", has delivered consistently above average returns. A portfolio based on Investors Chronicle's version of Zweig stock screen produced strong positive returns between 2005 and 2007, but was hit by the market turmoil of 2008. Even so, it has still outperformed the FTSE 100 index by 3.1 percentage points over that period. And the American Association of Individual Investors runs a 'Zweig' screen that has delivered performance little short of astonishing: cumulative gains of over 1,329.8 per cent from the start of 1998 to the end of April 2009, compared with a rise of 9.6 per cent in the Nasdaq Composite and a fall of -6.2 per cent for the S&P 500.
Zweig doesn't like over paying for shares he regards as exciting - his aim is to identify high growth firms at a reasonable price, or as he himself puts it, companies demonstrating 'reasonable gains in sales and earnings'. Above all, he seeks consistency. For Zweig, earnings growth must be seen quarter on quarter, year on year - and it must be seen to be accelerating. In practice, that means he wants earnings that are growing faster than they were a year ago, and over the preceding three years.
But what makes him different from other growth style investors is that he also thinks value investing has a role to play - you shouldn't overpay for shares with poor fundamentals. In other words, he wants growth but not at any cost. So he also wants to buy at a price/earnings (P/E) ratio that is not too far above the average for the market.
But Zweig is also keen on three other key measures - sales growth, buying by insiders and share price momentum. He specifically demands that sales should be growing as fast as or faster than earnings. Hide Details