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What are we looking for?
It’s been nearly a year since we took a close look Validea.com’s Guru Screener, a tool that screens U.S. stocks based on the investing strategies of a series of top investing gurus of the past 50 years. Validea uses the screens to create model portfolios of stocks that most match these experts’ investing philosophies.

Give how much has changed in the market in the past 12 months, it raised the question in our minds: Which guru has had the best strategy to weather the ups and downs of the past year? And which stocks make the grade with that guru’s model?

The earnings yield investor
The answer is the Earnings Yield Investor, a model portfolio that follows the teachings of hedge fund manager Joel Greenblatt. The 20-stock version of the model turned in a return of 12.8 per cent over the past 12 months, the only one of Validea’s 12 guru portfolios to post a positive return in the tumultuous year. By comparison, the S&P 500 was down 29 per cent over the same period, and the median Guru portfolio performance was a 26-per-cent loss.

Mr. Greenblatt, author of the 2005 best-seller The Little Book That Beats the Market, preaches focusing on only two key measures when picking stocks: earnings yield (which is annual earnings per share as a percentage of the stock price, essentially the inverse of the price-to-earnings ratio), and return on capital.

Though Mr. Greenblatt favoured building a 30-stock portfolio using the stocks scoring highest on earnings yield and return on capital, Validea uses 10- and 20-stock model portfolios in its version, to keep them consistent with the sizes of the model portfolios it tracks on other Guru strategies.

Since the inception of Validea’s Earnings Yield Model Portfolio in 2005, it has generated returns of 18.4 per cent, compared with losses of 29.1 per cent for the S&P 500 over the same period.

The Stocks
The current top stock generated by the Earnings Yield Investor screen is Emcor Group Inc. EME-N, an electrical-systems construction and services company. The company’s earnings yield is almost 30 per cent, while its return on capital is 49 per cent.

It’s worth noting that none of the stocks that make the 20-stock portfolio have price-to-earnings (P/E) ratios above 13 – which is considerably below the S&P 500’s current overall P/E of 15. Most have P/Es below 10, which imply earnings yields above 10 per cent.