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Formula 90
The Formula 90 screen is a variation of the pure Relative Strength screen.
Like the other Growth screens, Formula 90 starts with the 100 top-ranked
stocks in the Value Line Investment Survey and then uses rankings culled
from Investor's Business Daily.
In an effort to generate a screen with a longer holding period than the monthly
or quarterly rotation associated with Unemotional Growth and Investing for
Growth, I tested a screen which holds five to ten stocks for a full year.
Building on James O'Shaughnessy's and others' emphasis on Relative Strength
for long-term Growth investing, I set minimum scores of 90 for both EPS (earnings
per share) and RS (relative strength) scores (from Investor's Business Daily)
and then used the RS screen as the final ordering factor.
Instructions to generate current rankings:
1. Start with the list of 100 Timely Stocks from page 27 of the Value Line
Investment Survey (excluding any stocks on foreign exchanges).
2. Look up the EPS and RS rankings for each of the stocks.
3. Identify only those stocks with minimum scores for both EPS and RS of
90.
4. Take the five (or ten) stocks from the list in Step 3 with the highest
RS rankings, using the higher EPS score to settle any ties for the final
position.
5. Hold for one year. (We'll also track this screen for a monthly, quarterly,
and semi-annual holding period as well, but only the annual method has been
backtested.)
Using an annual rotation (identical to the cycle used for the various Value
approaches, even though this is a Growth screen), this approach has a ten-year
compound growth rate of 35.99% for a five-stock model, and 35.33% for a ten-stock
version.
Here are the annual returns from 1987 - 1996:
5-stock 10-stock
1987 -2.90% 9.82%
1988 4.81% 3.74%
1989 45.17% 48.53%
1990 2.13% 5.94%
1991 160.72% 145.58%
1992 33.11% 7.64%
1993 43.59% 46.59%
1994 25.22% 22.03%
1995 65.22% 56.68%
1996 39.02% 55.14%
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