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Although buyback activity has been observed in the recent past, at least
one article suggests companies should continue to institute and raise their dividend
yields in 2013.
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Denitions and screens
Screening criteria
# VC1 VC2 VC3 Trending value VCZ
1 Price-to-Book Price-to-Book Price-to-Book Price-to-Book Price-to-Book
2 Price-to-Earnings Price-to-Earnings Price-to-Earnings Price-to-Earnings Price-to-Earnings
3 Price-to-Sales Price-to-Sales Price-to-Sales Price-to-Sales Price-to-Sales
4 Price-to-Cashow Price-to-Cashow Price-to-Cashow Price-to-Cashow Price-to-Cashow
5 EBITDA/EV EBITDA/EV EBITDA/EV EBITDA/EV EBITDA/EV
6 Shareholder yield Buyback yield Shareholder yield Dividend yield
7 6 month momentum
The rst ve criteria are identical for all composite screens.
Items 1 to 4 (PB, PE, PS, PC): lower is better.
Items 5 to 7 (EBITDA/EV, SY, BBY, DY, 6 mom): higher is better.
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Outline
1
Revision history
2
Who is James OShaughnessy?
3
Benets of stock screening
4
Screen details
5
Zacks.com implementation
Data collection
Data processing
6
Portfolio123.com implementation
Data collection
Data processing
7
Conclusion
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data collection
Variable denitions
Category Variable Used for
Valuations P/E (Trailing 12 month) PESCORE
Valuations Price/Cash Flow PCSCORE
Valuations Price/Book PBSCORE
Valuations Price/Sales PSSCORE
Balance sheet Receivables Cash = CAARINV
Balance sheet Inventory Cash = CAARINV
Balance sheet Current assets Cash = CAARINV
Balance sheet Long term debt EV = mktcap +prefeq. +LTDcash
Balance sheet Preferred equity EV = mktcap +prefeq. +LTDcash
Company descrip. Sector Sector classication
Company descrip. Industry Sector classication
Dividends Div Yield % DY substitutes for SY & BBY
Inc. Stmt. & growth Annual Sales Industry median OM & NPM (FUNDA)
Inc. Stmt. & growth EBITDA EESCORE and Industry median OM (FUNDA)
Inc. Stmt. & growth Net Income Industry median NPM (FUNDA)
Liquidity & coverage Debt/Equity Ratio Industry median D/E (FUNDA)
Price & Price Changes % Price Change (YTD) Screen assessment
Price & Price Changes Beta Screen assessment
Note: FUNDA = data to be used later in fundamental scoring.
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data collection
Data collection
Navigate to ZACKS.COM SCREENING STOCK SCREENING.
SIZE & SHARE VOLUME group Market Cap >= 1000, Add.
Select EDIT VIEW and select all of the variables on the previous
slide.
Click RUN SCREEN
Note: If you want to apply the screen to a specic sector add
SECTOR from the COMPANY DESCRIPTORS group as criteria.
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data processing
Data processing 1/2
Download the data into excel: Click Export, then open le in
Excel.
Add a column for Cash = CAARINV.
Add a column for EV = mktcap +prefeq. +LTDcash.
Add a column EE = EBITDA/EV.
Add a column PxSCORE for each of the rst four value criteria.
For example, PBSCORE with the Excel formula
PBSCORE = 1IF(C3 = 0, 0.5, PERCENTRANK(C$3 : C$2694, C3))
This assigns a higher score to stocks with lower Price-to-X ratios.
Do not forget the $ in the rst argument of PERCENTRANK.
Higher EBITDA/EV is better because it indicates higher earnings
(EBITDA) at a lower theoretical takeover price (EV).
EESCORE = PERCENTRANK(S$3 : S$2694, S3)
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data processing
Data processing 2/2
Unfortunately Zacks does not provide BBY data. For now, let
DY = SY = BBY. A panelist at GAME IV disapproved of share
repurchases anyway.
Create a column SYSCORE in the same fashion as EESCORE
but reference the dividend yield cells.
Create a column SCORE to represent the total score:
SCORE = PESCORE +PCSCORE +PBSCORE +PSSCORE +EESCORE +SYSCORE
Stocks that pass the VC2 screen are those with a SCORE in the
top 10%:
VC2PASS =IF(PERCENTRANK(Y$3: Y$2694, Y3) >=0.9, 1, 0)
In Mosaic 2.0 we no longer include momentum as part of the
screen. Momentum information is covered in the Technical
quadrant.
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Outline
1
Revision history
2
Who is James OShaughnessy?
3
Benets of stock screening
4
Screen details
5
Zacks.com implementation
Data collection
Data processing
6
Portfolio123.com implementation
Data collection
Data processing
7
Conclusion
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data collection
Variable denitions
Var Description Formula
$PB Price to book (mrq) Pr2BookQ
$PS Price to sales (ttm) Pr2SalesTTM
$PE Price to earnings (ttm) PEExclXorTTM
$PC1 Price to free cash ow (ttm) Pr2FrCashFlTTM
$PC2 Price to cash ow (ttm) Pr2CashFlTTM
$EE EBITDA to Enterprise Value EBITDA(0,ttm)/EV
$DY Dividend yield (%) Yield
$BBY Buyback yield (%)
ShsOutAvgPTMShsOutAvgTTM
ShsOutAvgPTM
$SY Shareholder yield (%) $DY + $BBY
$MOM Six month price change (%) Pr26W%Chg
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data collection
Procedure
Log in to Portfolio123.com using the username and password I
will provide in class.
Click Screener
Click Infotech
Notice mktcap > 200M since JO sector screens are based on All
Stocks (mktcap > 200M, p. 49).
WWoWS (p. 321) mentions general screens applied to Large
Stocks (mktcap > mean, p. 49) also improve risk adjusted returns.
For perspective, the smallest S&P500 company is about $11B
Click Results
Verify VC2 is selected as the Report
Click Run
Click download
Thats it!
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data processing
Generate score variables
Open the Portfolio123.com le in Excel.
Add a column PxSCORE for each of the rst four value criteria.
For example, PBSCORE with the Excel formula:
PBSCORE = IF(C3 = NA, 0.5, 1PERCENTRANK(C$3 : C$2694, C3))
This assigns a higher score to stocks with lower Price-to-X ratios.
Do not forget the $ in the rst argument of PERCENTRANK.
If a value is missing (NA) a neutral rank (0.5) is assigned (WWoWS
appendix page 3)
Higher EBITDA/EV is better because it indicates higher earnings
(EBITDA) at a lower theoretical takeover price (EV).
EESCORE = IF(S3 = NA, 0.5, PERCENTRANK(S$3 : S$2694, S3))
Create a column SYSCORE in the same fashion as EESCORE.
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Data processing
Total score and screen winners!
Create a column SCORE to represent the total score:
SCORE = PESCORE +PCSCORE +PBSCORE +PSSCORE +EESCORE +SYSCORE
Stocks that pass the VC2 screen are those with a SCORE in the
top 10%:
VC2PASS = IF(PERCENTRANK(Y$3 : Y$2694, Y3) >= 0.9, 1, 0)
Sort by VC2PASS (descending) and $MOM (descending).
Voila! The top 25 stocks in that list constitute the Trending value
portfolio.
We cant buy 25 per sector but we can analyze 25 per sector
(plus some that do not pass the screen) and choose the best
ones to analyze further.
You may wish to start with the median two (stocks 12 and 13).
Median stocks may mimick the portfolio (See The real cost of equity
by Goedhart, Koller, and Williams (2002) in McKinsey on Finance).
Very low PB and PE could indicate distress.
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
Outline
1
Revision history
2
Who is James OShaughnessy?
3
Benets of stock screening
4
Screen details
5
Zacks.com implementation
Data collection
Data processing
6
Portfolio123.com implementation
Data collection
Data processing
7
Conclusion
Revision history Overview Benets Screen details Zacks implementation Portfolio123 implementation Conclusion
What did we learn?
Stock screening the JO way allows one to identify value stocks
with growth potential.
Portfolios formed with the value-based screens signicantly
outperform the market as a whole and the S&P500 on a
risk-adjusted basis.
Their are ve basic value criteria (PB, PE, PS, PC, EBITDA/EV)
plus shareholder and buyback yield.
Adding the six month momentum to the VCx screens can further
enhance risk adjusted returns. However, we dont need to worry
about momentum while screening in Mosaic 2.0.
Zacks can be used to create a close approximation to the
screens in the JO book.
A screening tool that includes six month price appreciation and
buyback yield would be nice.