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O'Shaughnessy Cornerstone Value | using Dividend Yield
O'Shaughnessy's Cornerstone value screen reveals that a large-caps stock portfolio with shares outstanding and cash flow per share exceeding all-stock averages, when ranked for high dividend yields performed best over the long term.
The Cornerstone Value stock screener implements the value 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.
Check out ValuePickr's Cornerstone Value Stock Screener selections for the Indian Stock Market, here.
O'Shaughnessy Cornerstone Value Investment Approach
What works on Wall Street: A Guide to the best-performing Investment Strategies of All Time - provides a detailed examination of basic value investment strategies - and is the primary source and inspiration for this article, and the stock screen.
Stock Picking strategy: Top Yielding companies significantly outperform
O'Shaughnessy found that the value approach was better suited to the large cap universe than the all-stocks universe. He reasoned perhaps smaller cap stock with low valuation ratios do not have the resources to bounce back to glory. Large caps were also less volatile than the all-stocks universe - which fits nicely into the more conservative goal of the cornerstone value approach.
He tested a large number of simple value strategies like high dividend yields, low price to earnings ratios, low price to book ratios and low price to sales to reveal pockets of value-price mismatch - stocks priced attractively in relation to these value measures. These led him onto identifying the combination of value-based strategies that worked best over the 40 year period.
The Cornerstone Value stock screener ultimately relies upon dividend yield to highlight attractively priced stocks. To help screen out potentially weak companies, O'Shaughnessy specified that the companies should have a cash flow per share which exceeds the database average. He also specified total sales of a company to exceed 1.5 times the average database sales. Lastly he added a liquidity measure of number of shares outstanding to be greater than the database average.
O'Shaughnessy Cornerstone Value Stock Screen Design
Objective
Primary Criteria
Criteria to locate stocks that match our screening objective
1. The stock screen was applied to the large cap stocks universe.
2. Stocks with market capitalisation that exceeded the avarage market capitalisation of the all-stocks universe, formed the large cap universe.
3. Finally O'Shaughnessy ranked the passing companies for highest dividend yields.
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. The number of shares outstanding be greater than the average stocks outstanding - a stock liquidity measure.
2. O'Shaughnessy next specified filtering for cash flow per share exceeding the database average.
3. Next filter applied is for a firm to have total sales 1.5 times the database average sales.
