Investing For Growth
Investing For Growth
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FOOL GLOBAL WIRE LEXINGTON, KY. (November 12): Well, they told us it was going to happen and it did. What more could you ask for? Claire's Stores announced last week that their third-quarter earnings were going to be strong, but the market just wouldn't believe it. The stock has been hammered of late, losing some 40% of its value, but it bounced back strongly today after releasing its quarterly results.
Income for the quarter was up 51% and earnings were up 45%, totaling 16 cents per share. First Call's estimates were for 15 cents. Perhaps more important than the 7% earnings surprise were Claire's comments that it expects a strong fourth quarter as well. The stock jumped nearly 9% today, helping to cut some of its recent big losses.
Turning the page a bit, one of the things I mentioned I was planning to do is run tests on my new "Unemotional Growth" screens, using different holding periods, to see if the approach is useful in a less actively-traded setting. I've finished testing the screens on a one-year holding period and here's what I discovered.
First, the procedure I used. I took the 100 stocks ranked #1 for Timeliness by Value Line and then recorded the EPS (earnings per share) and RS (relative strength) percentile rankings from Investor's Business Daily. I only included stocks which had a percentile score of at least 90 for both categories. This is a slight departure from the monthly Unemotional Growth approach, but for a much longer holding period, I wanted the tighter controls of a minimum score.
Then I gathered the annual price data and calculated capital gains for all the stocks meeting those criteria. I screened the lists three ways to see what screens work the best for an annual holding period. All of the portfolios were ten-stock groups (plus ties).
The three screens were:
--- EPS (taking the highest EPS stocks, breaking ties with the RS ranking) --- RS (taking the highest RS stocks, breaking ties with the EPS ranking) --- Combination (adding the RS and EPS scores, taking the highest composite scores)
The best of the three screens was the RS screen, by far. This coincides with a point we've been discussing in the IFG message folder, where the EPS screen I use in the monthly screen isn't as effective for longer holding periods. In fact, in an annual holding period like this test, the EPS screen was the weakest of the three.
The compound growth rates from 1987 through last week (not quite 10 years), were as follows: RS screen 35.11% Combo screen 27.31% EPS screen 22.67% Interestingly, the RS screen was also the only one to go the entire decade without a losing year, even posting modest gains in the crash year in 1987 and the recession in 1990. And also interestingly, a five-stock approach using the RS screen would only have boosted the returns a tad over 1 percentage point per year.
What can we conclude? First, it's reasonable to assume that the screens in the Unemotional Growth approach work well over many holding periods, but second, the EPS screen seems suited only for the more frequently updated approach, while the RS screen does a better job for longer holding periods. This seems consistent with the findings in Jim O'Shaughnessy's What Works on Wall Street.
I'll continue to post more findings on these screens as I finish various tests. Stay Foolish!
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