What are we looking for?
A strong value investing screen for U.S. stocks in a time when the market is rocky.
More about today’s screen
We’ll ask for help with this from Morningstar CPMS, an equity research shop. Craig McGee, a senior consultant with CPMS, ran a screen than ranked the U.S. stocks CPMS follows by three key valuation metrics: price to earnings, price to cash flow and free cash flow yield (operating cash flow less capital expenditures divided by the latest price).
But Mr. McGee wants to avoid value traps, which is where investors get stuck buying a stock which looks cheap, but keeps on getting cheaper. So he also screened for three month earnings estimate revisions, hoping to ensure the stocks have flat or improving profits.
Mr. McGee also screened for:
- market caps greater than $1-billion (U.S.)
- average daily volume greater than $2-million
- three or more firms providing EPS estimates
More about CPMS
CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 700 of the largest and more liquid Canadian stocks, plus more than 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.
What did we find out?
The U.S. value screen is the best performing portfolio strategy for CPMS this quarter, Mr. McGee said. It has a total return of 13 per cent for the quarter to date, versus the S&P 500 total return index at 8 per cent for the same period. This is after the screen returned negative 26 per cent in the second quarter, versus negative 14 per cent for the benchmark.
“In hopes of finding a market bottom, investors and speculators have been rushing in to find stocks that have been hit the hardest and may be considerably undervalued,” Mr. McGee said.
The value strategy also has done well over the long term. Going back to the end of 1993, it has returned 15.8 per cent annualized, versus 7.7 per cent for the benchmark.