Screen Me Up, Scotty

So, do you really want to invest like Buffett? (Warren, not Jimmy.) How about Ben Graham or Peter Lynch? While stock screens can't promise the same results achieved by these giants of investing, they can steer you toward the types of companies such legends might have liked (or may still like).

One source for such screens is the American Association of Individual Investors. This fine, not-for-profit organization provides educational publications and tools for us little guys, and produces 60 stock screens based on various investing methods. Reading through the monthly AAII Journal, I was pleasantly surprised to see The Motley Fool's Small Cap Foolish 8 screen leading all others so far this year with a return of 65%.

The screens
In case you're not familiar with the term, a screen is simply a list of criteria. If a company passes them all, it passes the screen. The Foolish 8 is designed to find profitable, fast-growing, small-cap stocks. (I listed the eight criteria last month and highlighted one of the companies that made the list: Medifast (AMEX: MED  ) , a maker of weight-management and meal-replacement products.)

Like all other screens employed by the AAII, the Foolish 8 is not meant to be used in a mechanical way. The organization calculates returns mechanically (stocks are purchased in equal dollar amounts at the start of the month and sold/rebalanced at the end of the month), but that's done simply to provide a comparison of the different screens. As explained on its website, the screens should be used "only as examples of the companies you would find when applying a specific investment technique."

And that's what makes the AAII screens interesting. They try to identify stocks that may have caught the eye of investing legends (as well as some not-so-legends). Here are just a few examples:

  • Benjamin Graham: Three separate screens that focus on the concept of intrinsic value, justified by a firm's financial strength.
  • Warren Buffett: Three separate screens seeking "consumer monopolies" selling at a reasonable price.
  • David Dreman: A contrarian investing screen.
  • James O'Shaughnessy: Both growth and value screens.
  • Peter Lynch: Concentrates on familiar companies and fundamental analysis.
  • Philip Fisher: Attempts to apply Fisher's famous 15-point system.
  • William O'Neil: Two screens using O'Neil's CANSLIM method.

Obviously, no screen is going to produce a list of every company that Buffett or Lynch is currently considering, but it's an interesting exercise.

While the Foolish 8 screen has had an outstanding 2003 to this point, it's also done quite well since the AAII started tracking such things in 1998, returning a total of 222%. That's second in the growth category only to the O'Neil screens, which have returned 503% and 446%. The benchmark S&P 500 is up 27% during the same period.

Topping the "growth and value" category is a screen based on fund manager Martin Zweig's preferences for strong growth companies with a reasonable P/E ratio. It has gained 573% since 1998. Meanwhile, the three Buffett screens have returned a respectable 115%, 62%, and 65%. A John Neff contrarian screen leads the pure value category with a 340% gain.

The companies
Again, these are not mechanical investing screens, and are only designed to single out a limited group of companies for further research. In that spirit, I looked through some of the better-performing screens to see which companies were showing up on multiple lists. Here are a few you may be interested in:

  • Lennar (NYSE: LEN  ) -- This homebuilder shows up on the Zweig, O'Shaughnessy, and two of the Buffett lists, as well as one for businesses with a high return on equity (ROE). And Lennar is hardly alone in its sector. Other companies in the construction services industry made multiple screens, including Pulte Homes (NYSE: PHM  ) , Ryland Group (NYSE: RYL  ) , D.R. Horton (NYSE: DHI  ) , and Dominion Homes (Nasdaq: DHOM  ) .

    It wasn't much of a surprise, then, to read yesterday that Lennar reported a 22% increase in home orders for the last quarter. The real question is whether the homebuilders have seen their best days since interest rates have started notching back up. Perhaps. Or maybe they'll continue to defy gravity.

  • University of Phoenix Online (Nasdaq: UOPX  ) -- This is the company that makes it easier for working adults to obtain a bachelor's, master's, or doctoral degree. It's only on the Foolish 8 screen, but Apollo Group (Nasdaq: APOL  ) -- University of Phoenix's parent company -- passed a Buffett screen and two others.

  • SupportSoft (Nasdaq: SPRT  ) -- A software company that designs time- and labor-saving products. It's growing sales at about 35% a year, has been free cash flow positive since the beginning of 2002, and carries no long-term debt. It shows up on the Foolish 8 and CANSLIM screens.

  • Synovis Life Technologies (Nasdaq: SYNO  ) -- Another that appears on both the Foolish 8 and CANSLIM screens, Synovis makes specialty medical products used in various types of surgeries.

  • Fresh Del Monte Produce (NYSE: FDP  ) -- I saw this food and fresh produce distributor on the John Neff screen and several others. It's obviously no flash in the pan; its brand has been around for 111 years and is recognized worldwide.

If you're interested in stocks that pass the Foolish 8 screen, a list is available each month in Tom Gardner's Hidden Gems newsletter (and there's a free trial available right now). You can also hang out on our Foolish 8 discussion board, where members will be happy to explain their own processes.

For other screens mentioned here, head on over to the AAII website. You'll need to pay a membership fee for full access, however. For those who want to play around with a screening tool on their own, feel free to try out the one available in Microsoft's (Nasdaq: MSFT  ) MSN Money section.

Finally, if the idea of mechanical investing appeals to you (buying and selling purely on what a screen produces), you'll find an incredible wealth of information on our Mechanical Investing discussion board.

Screen on!

Rex Moore's favorite football play is the screen pass. At time of publication, he owned shares of Microsoft, but no other companies mentioned in this article. The Motley Fool has a nifty disclosure policy.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 493209, ~/Articles/ArticleHandler.aspx, 10/4/2015 3:54:41 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rex Moore

Rex Moore spent his formative years in Texas, and fought beside Davy Crockett at the Alamo. He currently travels the globe for TMF, bringing back video reports on conferences and companies that matter for investors.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,472.37 200.36 1.23%
S&P 500 1,951.36 27.54 1.43%
NASD 4,707.78 80.69 1.74%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/2/2015 4:00 PM
APOL $11.01 Up +0.14 +1.29%
Apollo Group CAPS Rating: *
DHI $29.73 Up +0.15 +0.51%
D.R. Horton, Inc. CAPS Rating: ***
DHOM $ Down %
Dominion Homes, In… CAPS Rating: No stars
FDP $39.42 Up +0.05 +0.13%
Fresh Del Monte Pr… CAPS Rating: ****
LEN $49.08 Up +0.25 +0.51%
Lennar Corp CAPS Rating: ***
MED $27.02 Up +0.32 +1.20%
Medifast, Inc. CAPS Rating: ***
MSFT $45.57 Up +0.96 +2.15%
Microsoft CAPS Rating: ****