1 Advanced Investing Topics Spring 2017Stock Market Winners Kassie Beachum, Sage Sterrett, Crystal Taren, Mic Dabulskis, & Beau Lewis Advanced Investing Topics Spring 2017
2 Stock Market Winners -Study Background-222 companies were chosen from The Greatest Stock Market Winners: ," published by William O'Neil & Co. September 1989 AAII Journal titled “Investment Characteristics of Stock Market Winners,” Variables examined: smart money, valuation metrics, technical indicators, earnings and profitability measures, and other miscellaneous measures. Of these 222 companies returns (based on price appreciation) >½ increased in value by 237 % including outliers average increase in value: 349% Marc Reinganum This article was adapted from an article that appeared in the March-April 1988 issue of the Financial Analysts Journal. Phillips professor of finance in the College of Business Administration at the University of Iowa. Screen Criteria – Historical Returns- Portfolio – Risk and Challenges -
3 Stock Market Winner Screen Criteria- Growth & Value with Price Momentum - Current Criteria AAII interpretation Strategy Focus Price-to-Book Ratio ≤ 1.5 Value Pre tax margin (+) Accelerating quarterly earnings Growth & Momentum RSI minimum of 70% Momentum Stock is being sold at 15% of its max price Miscellaneous < 20M Shares outstanding momentum - Requirements (cristal) price (Kassssssssssssssssssss) minfumdamental limited float
4 Price-to-Book Ratio - Value strategy -Original Study Current Criteria Focus on neglected firms Price-to-Book ≤ 1 Study Average .95 Price-to-Book ≤ 1.5 larger group of companies Fama and French purposely excluded financial firms from their analyses of the factors driving stock returns because the high leverage that is normal for these firms does not convey the same level of risk as it does for other firms. June 1992 Journal of Finance, is among the most cited research on the performance of the price-to- book ratio in modern times. Analysis This metric must be used in conjunction with current market conditions (bull/bear). The adjustment made is reasonable
5 Minimum Fundamentals - Value strategy -Original Study Current Criteria Five-year annual growth rate in EPS based on the firm's fiscal data Positive pretax profit margin Five-year growth in EPS from continuing operations Positive pretax profit margin using operating profit margin These two fundamentals proves that a company’s fortune has turn around. Both historically and currently a five year growth rate in earnings per share. However historically the growth rates used in the screening were based upon fiscal-year data, this did not show intra-year turnaround as quickly as the trailing quarterly data. Currently the five year growth in earnings per share is required from continuing operations. The second criteria requires a positive pretax profit margin. In the original study this was calculated by taking sales and subtracting COGS, operating expenses, interest expenses, depreciation and amortizations and then dividing that by sales. However, analysts found that substituting the pretax profit margin with the operating profit margin, is less of a Hassel and it gives you the same result. It is important to remember that requiring a high profit margin as a screening criteria does not allow us to see part of these major price advancements. Analysis These fundamentals do not offer much restriction, however together they help the screen weed out weak firms with a slow turnaround rate.
6 Requirements for Momentum -Earnings Acceleration-Same-quarter growth in earnings per share from continuing operations from Q5 to Q1 is greater than the same-quarter growth in earnings per share from continuing operations from Q6 to Q2 Earnings per share from continuing operations for each of the last two fiscal quarters (Q1 and Q2) are greater than the earnings per share from continuing operations for the same quarter one year prior (Q5 and Q6) Original Study Current Criteria Focus on quarterly earnings growth Account for seasonality Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 5 Quarter 6 Quarter 7 Quarter 8 2017 | 2016
7 Technical Analysis & Price Appreciation - Price Momentum -Original Study Current Criteria Required the use of Datagraph books weighted 40% in most recent quarter and 20% weighted in previous 3 quarters Weighted relative strength for last 4 quarters higher than 70% In the original study they used the information from Datagraph books that included fundamental and technical data to help identify stocks that have already shown upward price movement. A stock is more likely to advance if its current stock price is near its high, and by using the Datagraphs you could indicate the stocks most likely to advance. The original study showed us that with high datagraph rankings, improving relative strength and a current stock price near its high are all likely indicators the stock will advance further. They found that the weighted relative strength ranking was the primary price momentum indicator used in the study. It was a requirement that the most recent quarterly price change be give a weight of 40% and the previous three quarters be weighted by 20%. The data indicated that the stock winners had realitive strength of 70% or better before their price move. So they made this a critera and continue to impliment it today by requirming the weighted realitive strength for the last four quarters to be higher than 70% in their entire data base. The use of datagraphs are no longer used, as analysts have found that not everyone has access to these datagraph books. However, over time analysts have found that not everyone has access to Datagraph books so they weighted relative strength is used as a primary price momentum indicator. Analysis Weighted relative strength for the last 4 quarters of 70% is a positive indicator that the stock price is more likely to continue to increase than not.
8 Miscellaneous Limited Float: Limited float refers to the number of shares outstanding 20 Million Shares outstanding requirement Ratio of price on buy date: Measures how favorable the firms are with investors Must be selling within 15% of previous two year highs Limited float examines the number of shares outstanding, from the original study to the current criteria there is no change here. WE recognize that a common trait that all these winning stocks share is having fewer than 20 million shares outstanding just before their main price rose. The average number of shares outstanding was 5.7 million and we recognized that during a two year period these doubled. This is an indicator that many firms most likely split their shares during their price increase. The ratio of price on the buy date was from the original study and continues to be implemented. This is a measure of whether the firm has fallen out of favor among investors over the last two years. In the original study it was found that more than 80% of firms were selling within 15% of their previous two year highs. This proved to me a continued captured common characteristic of the winning stock and continues to be a required criteria.
9 Historical Returns Stock Market Winners S&P 500 YTD -0.4% 1.8% 5 Year20.9% 11.7% 10 Year 15.8% 4.7% This graph indicates that Stock Market winners have consistently and significantly outperformed the S&P 500
10 Implementation Average number of passing companies: 12Analyzing and purchasing for multiple clients should not be a big burden Passing companies are Illiquid Entering positions will take time (1-11 trading days) Exiting positions may be difficult and take time relative strength ?
11 Five Passing CompaniesCompany Price (3/6) Mkt Cap B/A (%) B/A Spread Vol (Avg) P/Bk P/E Beta Shares Out Screen Req(Avg) $27.69 484.3 NA 0.95 13.6 1.14 <20M Two Rives Bancorp (TRCB) $17.43 152.2 0.29% $0.05 16,435 1.24 14.77 0.59 8.78M First South Bancorp (FSBK) $11.79 112.14 2.97% $0.35 7,566 1.3 16.37 0.38 9.49M Capital City Bank Group (CCBG) $20.31 344.21 1.08% $0.22 25,353 0.96 29.68 0.88 16.81M Eagle Bancorp Montana (EBMT) $19.57 71.8 2.04% $0.40 16,251 1.35 15.98 3.68M Peoples Bancorp (PEBO) $32.35 588.59 0.37% $0.12 49,621 1.36 18.9 0.68 18.2M general info highlight bid ask spread & average volume
12 Order Execution *200K/ Company Avg Vol ($) 20% of Avg Vol ($)Days to execute Two Rives Bancorp (TRCB) 286,462 57,292 3.49 First South Bancorp (FSBK) 89,203 17,841 11.21 Capital City Bank Group (CCBG) 514,919 102,984 1.94 Eagle Bancorp Montana (EBMT) 318,032 63,606 3.14 Peoples Bancorp (PEBO) 1,605,239 321,048 0.62 20% of average volume to not effect price
13 Risks to Investment Historic risk to market: 1.44x52 week relative strength: 27.3 This presents some risk as these companies are considered underperformers That’s what this screen looks for Turnover: 57.9% of monthly holdings High turnover compared to all AAII screens Average turnover for growth and value w/ momentum screens is 56% Could be beneficial as those companies are no longer neglected This is a high turnover because only 40% of the passing companies are constantly meeting the criteria Could be beneficial because these stocks are refreshed often so other investors have to be quick to catch on. Lack of diversification This presents some risk as these companies are considered underperformers, however that’s what this screen looks for. Skews the P/B Note: P/B fluctuates in bull/bear markets Bear= many firms trade <1 Bull= many firms trade >1, except trouble companies
14 Risk to Investment Majority of passing companies are financial institutions Lack of diversification Skews the P/B- Higher level of risk (leverage) Fama and French (1992) P/B fluctuates in bull/bear markets Bear= many firms trade <1 Bull= many firms trade >1
15 Conclusion Is it difficult to implement for clients? Will this screen continue to outperform?
16 Sources Reinganum, Marc. "Investment Characteristics of Stock Market Winners." AAII Journal (1989): n. pag. American Association of Individual Investors. Sept Web. Rotblut, Charles, CFA. "Using Book Value to Judge a Stock’s Worth." American Association of Individual Investors (n.d.): n. pag. AAII. June Web. Thorp, Wayne A., CFA. "Screening for Tomorrow’s Stock Market Winners." Screening for Tomorrow’s Stock Market Winners Oct (2011): n. pag. Web.