Visit each month to read about a different stock screening strategy.Each week we'll reveal more aspects or variations of the featured screening methodology. The All Screens area on the right contains a complete listing of the stock screens and investment "gurus" we are profiling. Part 1: Applying the Rules
It has been ten years since AAII Journal published an article by Marc Reinganum, titled "Investment Characteristics of Stock Market Winners," which examined the common traits of a group of winning stocks. These types of examinations can be noteworthy if they help to establish financial relationships likely to hold true over time.
The study examined 222 stocks highlighted as winners in a publication by William O'Neil & Co. titled "The Greatest Stock Market Winners: 1970-1983." The goal was to establish the characteristics common to these stocks prior to their rise to super stock status. Nine trading rules were developed that helped to identify the winners:
- Price-to-book-value ratio less than 1.00;
- Accelerating quarterly earnings;
- Positive five-year growth rate;
- Positive pretax profit margin;
- Relative strength rank of at least 70;
- Relative strength rank of the stock in the current quarter is greater than the rank in the previous quarter;
- O'Neil Datagraph rating of at least 70;
- Stock selling within 15% of its maximum price during the previous two years; and
- Fewer than 20 million common shares outstanding.
The use of these rules or screening criteria produced returns significantly higher than the market. While the group of stocks passing the filter were slightly more risky than the market, the additional risk did not account for the extraordinary returns of the winners.
There can be problems encountered when trying to apply trading rules determined during a specific point in time with a specific group of stocks. This month we will create a screen that tries to interpret and apply these rules in the real market environment.
 Part 2: A Look at Value |
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