The Difference Between Stock Screens and Portfolios

Posted on May 29, 2014 | Investor Update
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Investor-Update
Many of the more common questions I get asked pertain to our stock screens. Specifically, members ask about the performance of the screens and how replicable it is. Often, the screens are initially mistaken for being portfolios, which they are not.

I’ll use the O’Shaughnessy: Tiny Titans screen and our Model Shadow Stock Portfolio to explain the difference between a screen and a portfolio. Both target micro-cap stocks, but with different approaches. The performance figures for both also have important differences to be aware of.

A stock screen is essentially a database filter. It seeks out stocks matching a specific set of criteria. For example, the Tiny Titans screen identifies U.S. exchange-listed stocks with market capitalizations between $25 million and $250 million, a price-to-sales (P/S) ratio below 1.0 and a 52-week relative strength price rank of 85% or higher. (The last criterion restricts the screen to only those stocks whose price appreciation is better than at least 85% of all other stocks.) Any stock matching these criteria passes the screen, regardless of how positive or negative any of its other characteristics are. This is why it is important to conduct analysis beyond what the screen is designed to look for and not simply buy a stock because it passes a good screen.

The performance reported for each of the more than 60 stock screens on AAII.com is calculated based on the month-end list of passing companies. We determine what stocks pass, group them into a hypothetical portfolio, hold the portfolio for a month and then restart from scratch the next month. This monthly reconstitution works fine for giving you an idea of the type of performance of the screen has produced, but your actual real-world returns may differ. The performance calculations exclude any transaction costs—such as commissions, bid-ask spreads and taxes. They also use prices that may differ from what you would actually be able to trade it at.

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