O'Shaughnessy Cornerstone Growth | using Relative Strength

The Cornerstone Growth stock screener implements the growth strategy developed by O'Shaughnessy using over 40 years of S&P Compustat data. 

O'Shaughnessy was the first person granted access to Standard & Poor Compustat database which contains price histories of more than 10,000 stocks from 1950 onward. O'Shaughnessy sifted through this gold mine of data, testing the results of innumerable stock-picking strategies against more than 40 years of market ups and downs. 

Before O'Shaughnessy, nobody had exhaustively time-tested investment strategies over so long a period, and with so large a universe of stocks. His conclusions were published in the book, What Works on Wall Street, a piece of groundbreaking research, and a runaway 1996 bestseller.

O'Shaughnessy Cornerstone Growth Investment Approach

What works on Wall Street: A Guide to the best-performing Investment Strategies of All Time - provides a detailed examination of basic growth stock investment strategies -and is the primary source and inspiration for this article, and the stock screen.

Stock Picking strategy: Use Relative Strength for picking Growth stocks

O'Shaughnessy's tests of basic growth strategies reveal that Relative Strength is an effective tool to use for the growth stock investor, working consistently over the 40-year test period. Relative strength compares the price performance of a stock to its corresponding Index. Stocks outperforming the Index have positive relative strength while those underperforming have negative relative strength.

He tested a large number of simple growth screens like high profit margins, high return on equity, high one year and five year earnings growth and high relative strength. The tests revealed that with the exceptions of relative strength and consistent earnings growth, most simple growth strategies proved risky and did not compensate investors adequately for the risks possible with these strategies.

Relative strength measures help to reveal pockets of exceptionally strong or weak performance. By combining relative strength, earnings consistency and balancing the growth requirement with a price-to-sales value measure O'Shaughnessy was able to construct a portfolio, which he termed as - Cornerstone Growth - that worked consistently with a desired combination of strong growth with reasonable risk.

O'Shaughnessy Cornerstone Growth Stock Screen Design

Objective

Primary Criteria

Criteria to locate stocks that match our screening objective

1. Smaller stocks have greater growth potential than large caps. The all-stocks universe is therefore used. O'Shaughnessy specified a Market capitalisation threshold of $150 million - to produce a starting base of companies

2. The cornerstone growth strategy focused on earnings consistency rather than relying on high earnings growth levels. 5 years of consecutive EPS growth is used.

3. Finally he ranked the passing companies for highest relative price strength over the past year

Secondary Criteria

Criteria that ensure that the companies passing the primary screen do not meet our objectives just by coincidence, but because they are deserving candidates and truly meet our objective. Usually these are useful to eliminate the duds from creeping in.

1. O'Shaughnessy prescribed balancing the above growth requirement by using a maximum price-to-sales ratio ceiling of 1.5