<FOOLISH FOUR PORTFOLIO>
A Do-It-Yourself Growth and Earnings Screen
EL SEGUNDO, CA (August 31, 1999) -- A number of people have written that they like the PEG screen but don't like Value Line's pricey subscription rate, which prevents many from calculating the screen themselves.
For those who prefer to do it themselves, or for those who would just like to have a second earnings and price momentum screen in their portfolio, the Formula 90 screen may be for you.
Robert Sheard came up with the Formula 90 screen. He based the screen on James O'Shaughnessy's and others' work that emphasized the importance of relative strength (RS) to long-term investing.
To generate the current stocks for this screen, do the following:
Step 1: Get the list of 100 Timely Stocks from either page 27 of the Value Line Investment Survey or from the electronic version of Value Line (excluding any stocks listed on foreign exchanges). The printed version can be found in almost any public library.
Step 2: Use Investor's Business Daily (IBD) to look up the earnings per share (EPS) and relative strength (RS) rankings for each stock.
Step 3: Record the RS and EPS ratings only for stocks that have scores above 90 in both categories.
Step 4: Take the five stocks with the highest RS rating. Use the EPS rating to settle any ties.
Step 5: Hold the stocks for a year and repeat the process.
The backtesting on this screen has been limited. It has only been backtested as an annual screen with a January start. However, the results are outstanding, with only one year showing a loss (1987). Here are the yearly results:
1987 -2.90% 1988 4.81% 1989 45.17% 1990 2.13% 1991 160.72% 1992 33.11% 1003 43.59% 1994 25.22% 1995 65.22% 1996 39.02% 1997 13.61% 1998 21.78% 1999 52.35% through 7/9/99From the returns above, we see that this screen works well with a January start and an annual hold. In 1997, Sheard tried various holding times for the Formula 90 and found that it did not work as well for shorter time periods.
If the lack of testing bothers you, have patience. Mechanical Investing message board contributors are in the middle of a massive effort to collect Value Line and IBD data all the way back to the 1960s. With that data, various members of the board plan to backtest the Formula 90 and all the RS screens. So by the end of the year, this screen may have an extensive history to look at.