What are we looking for?
In January, we attempted to combine the stock-picking methods of Warren Buffett and Peter Lynch. Our thinking was that, if Mr. Buffett and Mr. Lynch achieved stellar returns on their own, we could create a new super-species of investor by putting their two brains together in our top-secret Number Cruncher laboratory.
Today we’ll see whether our scientific hypothesis was correct, or if we accidentally created a monster.
Actually, we don’t have a top-secret laboratory. We used the “guru stock screener” from Validea Canada. (Globe Investor has a joint venture with Validea.ca, a premium Canadian stock screen service.)
Specifically, we searched for stocks that met the criteria of both the “P/E Growth Investor” screen, which is based on Mr. Lynch’s strategy, and the “Patient Investor” screen, which seeks to emulate the stock-picking methods of Mr. Buffett.
The P/E Growth Investor screen uses the PEG ratio, among other factors.
The PEG, which Mr. Lynch used when he was piloting Fidelity’s Magellan Fund to superior returns until his retirement in 1990, takes the P/E ratio and divides it by the earnings growth rate. Generally, the lower the PEG, the more attractive the stock is from a valuation standpoint.
Mr. Buffett looks for stocks with solid earnings growth and low price-to-earnings ratios, among other criteria. Validea’s “long-term EPS growth” number is actually an average of the three-, four- and five-year annualized growth rates, to smooth out the effects of one exceptionally good or bad year.
Using the results of the screen, we set up a hypothetical $90,000 portfolio with equal $10,000 investments in each of the nine stocks.
From the inception date on Jan. 18 through March 28, eight of the nine stocks rose, led by double-digit gains in Bird Construction and MTY Food Group. Over all, the portfolio posted an advance of 7.3 per cent, excluding dividends.
That handily beat the advance of 0.7 per cent for the S&P/TSX composite index over the same period, also excluding dividends.
So far, it looks as if our little experiment is working.
We’ll check back in a few months to see how the portfolio is faring. Remember that a stock screen is just a first step in the investing process. Be sure to research individual companies thoroughly before you invest.