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Several years ago Jim (mungofitch) talked about a monthly screen that went something like this:

1) Take the Russell 1000 (and top half by market cap of Russell 2000)[*] stocks that are also in the VL 1500.
2) Take only the 90% of the stocks closest to their 52-week high.(Drop the lowest 10%)
3)Take the top 100 by ROE ...
and those with earnings >0 and book value is < 0. (Because these are strong companies where the stats come out weird.)
4) Of those, top 25 by 5 Yr sales Growth.
4a) Hold any that are still in the top 30, but only 25 total. [**] (25HTD30)


I began this screen Jan 1, 2021. It is now almost 4 years later.
Thje average turnover has been 4-8 stocks a month. No rebalancing; the losers tend to get tossed out quickly.

My screen is up 56.2%
The S&P500 is up 57.0%

This screen has essentially matched the S&P500 with few stocks in common.
About 80% of the time (of days) or 91% (of months) it has been above SPY.

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[*] My addition. I do not know what difference these make. That market cap is 950M and above. It might be better to take just the top 500, which is well into the mid-cap range. The lowest mkt-cap in the VL1500 is about 300M.
The lowest mktcap in the Russell 1000 is 1,773M. Only about 1300 of the VL1500 are above that.

[**] I am not sure if this makes sense in a tax advantaged account. You would keep any stocks in positions 26-30 in favor of the last N stocks in positions 25 downward.

book value is < 0

is indeed weird. Can you explain?

Elan

book value is < 0
...
is indeed weird. Can you explain?

Very high quality businesses don't require much in the way of assets to earn each dollar of income: a high ROE is a good thing. A very small number of businesses require no net assets at all to make money. They are the very best businesses, with effectively infinite ROE. (often this is because their earnings are so reliable that they can sell enough bonds to buy back enough shares to fully wipe out their book equity value completely). This class of companies has included companies like Coke, Moody's, Oracle, BP, Lowe's, Philip Morris, Starbucks, Autozone, all with no positive asset value per share at all, at least some of the time.

But ROE is often calculated naively as earnings/book, so if book is negative but earnings positive you get a negative ROE figure rather than a more economically meaningful infinitely high one. A sort for high ROE will miss them.

You also get a negative ROE with positive assets and negative earnings, which is why both of them have to be checked for sign individually. You don't want these firms!

I usually check to make sure that BOTH trailing AND forward-estimate earnings are positive, to avoid accidental inclusion of a really bad business that is usually losing money but just had a one-off good period that made the trailing earnings good as a fluke. It can't hurt to also include the requirement that the projected earnings growth figure, if available, is positive and not negative, purely as a crap filter. The goal is to look for companies with regular positive earnings on the back of no net assets at all.

Jim

book value is < 0
...
is indeed weird. Can you explain?

What Jim said. Also answered in https://www.shrewdm.com/MB?pid=451219471

Here are the stocks VL1500 of Rus1000 for 2024-09-30 that meet "earnings are positive and book is < 0"
## Because these are strong companies where the stats come out weird.

Symbol      ROE%  Earnings  Book Value  Name
RNG         0.0%      0.91        -5.8  Ringcentral In
ALNY        0.0%      0.56         0.0  Alnylam Pharma
NTNX       -7.6%      0.27        -3.0  Nutanix Inc
SBAC       -9.9%      1.51       -49.5  SBA Communicat
RH        -11.3%      1.69       -12.7  Rh Common Stoc
DPZ       -14.2%      4.03      -111.3  Domino's Pizza
BOX       -14.4%      0.44        -3.1  Box Inc
MSGS      -18.7%      1.06       -11.1  Madison Square
YUM       -18.9%      1.35       -27.1  Yum! Brands
WING      -21.2%      0.93       -14.9  Wingstop Inc
OTIS      -31.7%      1.06       -12.3  Otis Worldwide
SMG       -41.2%      2.31        -2.6  Scotts Miracle
VRSN      -46.6%      2.01       -18.6  Verisign Inc
TNL       -46.6%      1.52       -12.7  Travel + Leisu
LOW       -47.1%      4.10       -24.3  Lowe's Compani
KNTK      -48.2%      0.54        -7.7  Kinetik Holdin
SBUX      -49.4%      0.93        -7.0  Starbucks Corp
AZO       -53.0%     48.11      -283.3  Autozone
WYNN      -53.8%      1.12        -8.1  Wynn Resorts L
CAH       -54.9%      1.84       -13.2  Cardinal Healt
FICO      -60.7%      6.25       -33.8  Fair Isaac and
TDG       -66.7%      9.00       -44.9  Transdigm Grou
HLT       -69.7%      1.91       -12.4  Hilton Inc
BRBR      -88.3%      0.54        -1.9  Bellring Brand
PRKS      -92.1%      1.50        -5.8  United Parks &
PM       -113.3%      1.59        -5.1  Philip Morris
PLNT     -122.0%      0.71        -3.8  Planet Fitness
PLTK     -127.1%      0.23        -0.3  Playtika Holdi
MSCI     -143.1%      3.64        -9.3  MSCI Inc
ORLY     -146.6%     10.55       -27.3  O'Reilly Autom
SMTC     -155.0%      0.11        -1.9  Semtech Corp
MCD      -178.7%      2.97        -6.7  McDonald's Cor
BKNG     -200.9%     41.90      -127.6  Booking Holdin
MO       -232.6%      1.31        -1.7  Altria Group
MAR      -239.6%      2.50        -7.4  Marriot Int Cl
HPQ      -266.4%      0.83        -1.4  HP Inc
MTCH     -467.7%      0.48        -0.5  Match Group In
MTD      -575.6%      9.65        -7.2  Mettler-Toledo
CHH     -3953.7%      1.84        -3.1  Choice Hotels

These are the ones that were in the final 25:
ALNY
BOX
BRBR
KNTK
PLNT
RNG
TDG
WING

A lot better than the SOS of high ROE / high rev growth I tried for a couple of years - but didn't buy top 25 or top 50 whatever it was, only top 5-7

Here are the stocks VL1500 of Rus1000 for 2024-09-30 that meet "earnings are positive and book is < 0"

Hmmm. Hotel companies are overweighted in the list (TNL, HLT, MAR, CHH). Something to do with property write downs?

DB2

Here are the stocks VL1500 of Rus1000 for 2024-09-30 that meet "earnings are positive and book is < 0"
...
Hmmm. Hotel companies are overweighted in the list (TNL, HLT, MAR, CHH). Something to do with property write downs?

Tobacco and airlines too. As with any quant screen, it will have flaws. You can also have negative book value by losing a HUGE amount of money at some point in the past. The notion is that the average is somewhat better than a crap shoot.

Still, it's a good neighbourhood: ROE very high, or infinite due to positive-earnings-negative-book.
In the VL group, top 30% by ROE return about 3.4%/year better than the bottom 30% by ROE. It's a simple starting criterion that makes a lot of business sense, especially if you can find a way to filter out a few obvious duds, for example if naively calculated ROE is huge because they're wildly overleveraged, or due to depressed book from a huge loss in the past.

Jim

I have VL 1700 online subscription. My question is how do you get Russell 1000 stocks from Valueline database. Sort the VL data for market cap and keep the highest 1000? Any other filters to use?
Thanks,
AJ

Still, it's a good neighbourhood: ROE very high, or infinite due to positive-earnings-negative-book.
In the VL group, top 30% by ROE return about 3.4%/year better than the bottom 30% by ROE.

*And* in the top rank of 5 year sales growth.


As far as "filter out a few obvious duds", this brings to mind an entry in my quotes file:

"Discretion over buy-and-sell decisions in aggregate can turn a model that generates a market beating return into a sub-par return.
The challenge is not for most investors in coming up with a workable investment strategy, but in trying to implement that strategy on an ongoing basis. The problem arises that there is always a plausible reason NOT to do something our strategy is telling us to do. The smarter someone is the more plausible a story they can come up with telling them their system is incorrect.
IOW, follow the signals religiously!" -- http://abnormalreturns.com/the-folly-of-trying-to-...

Reminds me painfully of when I sold TSLA (258.78) at 215.89 because it was clearly going to be a dud going forward.
Ditto AAPL (234.11) sold at 209.36 because they'd never be able to keep selling overpriced smartphones.
It's a lesson I (re)learn every few years.

how do you get Russell 1000 stocks from Valueline database.


Ah. https://www.barchart.com/stocks/indices/russell/ru... & https://www.barchart.com/stocks/indices/russell/ru...
Order by Market Cap.

With a free account, you can download one screen a day, the first 1000 rows.
I made a custom view with all the necessary fields.

Use the VL symbols to filter the Russell 1000/2000 downloaded data.
I don't have VL subscription, I get the list of stocks at the library.

I do the downloads and run a self-written bash script to do all the rules. Takes about 15 minutes once a month.

My question is how do you get Russell 1000 stocks from Valueline database.

You should get extremely close by using

Domi="us"
Market cap top 1000

That is very close to what Russell does, though they only reconstitute annually. June, if I recall. They do some extra checks related to domicile for edge cases, but that's about it.

Jim

In the VL group, top 30% by ROE return about 3.4%/year better than the bottom 30% by ROE.
...
*And* in the top rank of 5 year sales growth.

Actually no, that particular comment was about VL's reported ROE by itself, no other criteria other than requiring that the ROE field be populated prior to the top/bottom 30% cutoff test.

The top 30% an interesting pre-filter for a number of possible quality stock screens. Not all such stocks are good, but a preponderance of good businesses have high ROE figures, so they bubble to the top a bit statistically.

Jim

Thank you so much Ray and Jim.
Both of you have contributed a great deal to the wealth of this board (In terms of knowledge and finances).
Thanks,
AJ

Thanks. But in investing I mostly stand on the shoulders of others.
And then write about my own opinions, and share my thoughts.

Ray

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