The purpose of this article is a final follow up to my value investing screen/backtest based on reader comments and suggestions. To review my previous articles, I backtested a value strategy based on the following criteria starting in 1/1/2002 which rebalanced every 4 weeks and assumed .5% slippage.
Price to Book < 1
Return on Equity Last 12 Months > 0
Return on Assets Last 12 Months > 0
Total Debt to Equity < 40%
Current Ratio > 3
Price to Free Cash Flow Trailing 12 Months <15
Projected Earnings Next Fiscal Year > 0
No OTC Stocks
I backtested the same value investing strategy but which purchased passing companies only if the S&P 500 Index was also above its 200 day moving average. The goal was to reduce risk by staying in cash when the overall market is in a downtrend. This potentially reduces overall returns but can reduce drawdowns and general investor angst. Regular readers know I am generally a fan of this type of investing as a means to increase risk-adjusted returns. The primary inspiration for this type of strategy is Mebane Faber, author of The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets and creator of AlphaClone.
$100 invested in this strategy on 1/1/2002 turned to $574.70 assuming .5% slippage, no commission, rebalanced every 4 weeks, and no return on cash balances. For returns which ignored the underlying indices moving average please see my previous articles here and here. A visual represenation is below:
Secondly, I decided to run the screen on a longer timeframe in order to reduce turnover. The portfolio was rebalanced every 3 months. This screen was not run using the 200 day moving average requirement and all qualifying stocks were held (in other words, I did not limit the number of stocks as in some examples from my previous two articles). The results are not as impressive as a 4 week rebalance but still beat the benchmark. $100 turned to $321.30 :
However, when limiting the number of positions to no more then 5, ranked by the lowest return over the past 26 weeks, the returns are better on a 3 month rebalance. $100 turned to $749.50 (see below) and when ranked by the lowest returns over the past 13 weeks $100 turned to $424.
Finally, a reader suggested comparing my results to a different benchmark. Using the same timeframe, $100 invested in the Russel 200 Index turned to $129.60. This excludes dividends. When we compare this to an investment in IWM, the IShares Russell 2000 Index ETF, on 1/1/2002, the return with dividends would have been $142.38. These results are better then the S&P 500 Index benchmark but still far below any of the results posted in this article or my previous two articles.
As I noted previously, the screening/backtesting tool was StockScreen123, which is currently in Beta. Thus, please do your own due diligence before making an judgments, assumptions, or investment decisions based on data provided here. I have no position in the stocks mentioned. Below are the current results of the original value screen:
|12/30/09||Free Trend Analysis|
|ALG||Alamo Group, Inc.||Here|
|DWSN||Dawson Geophysical Company||Here|
|LAKE||Lakeland Industries, Inc.||Here|
|NWPX||Northwest Pipe Company||Here|
|QLTI||QLT Inc. (USA)||Here|
|AOB||American Oriental Bioengineer||Here|
|INET||Internet Brands, Inc.||Here|