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How AAII Builds and Presents Stock Screens

John Bajkowski President, AAII
John Bajkowski

President, AAII

Year to date, the Oberweis Octagon screen leads all approaches tracked by AAII, up 42.9% through the end of July. Such a high return is very tempting when the market is up only 6.3% over the same period. But blindly chasing high returns without understanding the drivers and characteristics of a given approach is often a pathway to disappointment unless the market environment that helped a given approach shine continue to hold true in the future.

The Stock Screens area of AAII.com is one of the most popular segments of our website. We are currently tracking the monthly holdings and performance of 63 different screens. A number of the screens are derivatives of a given approach; for example, there are nearly a half-dozen screens tied to the works by James O’Shaughnessy. Some of the screens are based upon general investing principles such as the price-to-free-cash-flow screen. Many screens are quantitative rules constructed from our interpretation of the works of successful investors.

Stock Screens Home Page
Stock Screens Home Page

For every screen, we present an explanation of the reasoning behind the approach and how the quantitative filter or screen was developed. In many cases, the screens are based upon books by the investor. We have also utilized interviews, prospectuses, articles and research studies to help develop and explain each screen. Our Oberweis Octagon screen dates back to an article by Wayne A. Thorp, AAII’s senior financial analyst, in the April 2002 issue of the AAII Journal. In the article, Thorp explains how Oberweis Asset Management uses AGARP (aggressive growth at a reasonable price) to seek out small- to mid-sized companies that are rapidly growing, possess strong relative price strength, yet are still priced reasonably. Oberweis uses eight primary rules which they term the Oberweis Octagon:

  • Rapid annual growth in revenue (sales),
  • Rapid annual growth in pretax income and earnings per share,
  • Products or services that offer the potential for strong future growth,
  • Favorable recent (quarterly) trends in revenue and earnings growth, ideally showing acceleration,
  • Reasonable (low) price-earnings ratio in relation to underlying growth rate,
  • Reasonable (low) price-sales ratio,
  • Review of company financial statements, especially the footnotes, to attempt to identify future problems, and
  • Strong price strength relative to the market (high relative strength).

The article illuminates why Oberweis feels these qualities are important elements to consider when selecting a stock and goes on to construct quantitative screening rules that try to capture the essence of the approach. Stock selection is a bit of an art, and constructing quantitative stock filters also requires some judgement and understanding to build filters that help to locate the types of companies you find desirable. It is best to think of each screen as the creator’s quantitative interpretation of an approach. Some approaches are very cut and dry, while others have nuances that are subject to judgment and interpretation.

Oberweis Octagon Screening Criteria
Oberweis Octagon Screening Criteria

The Oberweis filter is one of our more complex screens as it has different growth requirements and value requirements depending upon the size of the company. Small cap stocks under a billion in market cap have a higher growth and deeper value requirement than mid-cap stocks with a market cap up to eight billion. Sometimes we will break these filters into separate approaches.

Once we start tracking an approach in the Stock Screens area of AAII.com, we also present an edited version of the article used to construct the original screen. So when you click on one of the stock screens listed in the performance table, you are presented a web page that explains the approach and its construction and you are able to see which stocks currently pass the filter, the screening criteria used to determine which companies pass the approach, and table and chart of the monthly price performance of the screen over time.

Oberweis Octagon Passing Companies (7/29/2016)
Oberweis Octagon Passing Companies (7/31/2016)

Now only three companies passed our Oberweis Octagon screen at the end of the July. To see if that number is low relative to historical standards, you can look at the “Screen Characteristics” page within the stock screens area. This table reveals that on average 15 companies have passed the Oberweis screen each month since 1998. Month to month the turnover has averaged 41.9%.  The Screen Characteristics also revealed that the median trailing P/E ratio of the Oberweis Octagon stocks was high at 23.6, but the P/E ratio is low relative to the strong expected growth of these stocks. The AAII Oberweis Octagon screen looks for strong growth, notably high recent and expected growth. The passing companies are also smaller firms with a median market cap of $637 million. The screen also looks for companies with strong price performance, so it is not surprising that the passing companies have outperformed the S&P 500 by 64.7% over the last 52-weeks. Investors seek out stock with strong recent price performance with the expectation that the price momentum reflects “look at me” performance that brings attention to a stock that helps continue to push the stock price up.

You should note that spreadsheets behind all of the tables presented in the Stock Screens area can be downloaded for further analysis. For example, the annual performance spreadsheet allows you examine the year-by-year price performance of each strategy and compare it against other approaches and the benchmark indexes. The Oberweis Octagon screen’s performance has been strong, but its volatility is nearly double the market level.

Stock Screen Performance Spreadsheet
Stock Screen Performance Spreadsheet

The stocks screens offer the best of both worlds. They offer the individual investor a rich educational source of investment approaches that present the types of and factors investor should consider when selecting stocks. The screens offer a theoretical discussion as well as a practical example of the stock selection process. The stocks screen area of AAII.com also offers individuals a wide array of stock ideas. The screens are only the first step in the investment process. You can use them to generate an initial list of potential investments that merit further research. Keep in mind that the screens here are our own interpretations of the investment approaches advocated by numerous strategists.

The AAII stock screens are one of the many benefits of membership. To learn more, consider a risk-free 30-day Trial AAII Membership to start becoming an effective manager of your own assets.

 

5 thoughts on “How AAII Builds and Presents Stock Screens”

    1. AAII’s fundamental stock screening and research database program, Stock Investor Pro, covers U.S.-traded stocks with current financial filings. The database currently consists of roughly 7,000 companies. With the software, you can update the database on a daily basis so you can be running the screens on a daily basis as well.

       
      1. Thanks for the reply. That is what I thought the answer was going to be. How much does the program cost per year?
        Paul

         
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