AAII Stock Screens: 10 Year Winners

Last night I was reading AAII Journal, a monthly publication sent to members of the American Association of Individual Investors. It is one of my favorites primarily due to some of the information they share about their stock screens.

In this month's journal, they provided a useful yearly performance roundup using 10-year data for all of their stock screens which is also accessible through their website. That's a unique offering since few have or will share that kind of data. While past performance doesn't guarantee future performance, when you have 10 year data to work with it helps.

When looking over the information, among many things I noticed include the fact that 7 stock screens have posted gains for every year over the past 10 years. Screens with this amazing consistency include Graham's Defensive Investor, Price-To-Sales, Zweig, PEG With Est Growth, PEG With Hist Growth, and two of O'Shaughnessy's screens - Small Cap Growth & Value and Growth. Few screening strategies can produce gains year after year as these have and there's something to be learned from them.

Looking through and comparing the criteria between all of these screens, in essence they were seeking four simple things: 1) growing earnings per share over various time frames, 2) strong sales growth, 3) an attractive valuation (often using price-to-sales), and 4) relative strength.

Bottom line: Sometimes simple screens that seek common sense criteria (strong sales & earnings, attractive valuation, and relative strength) work the best over long periods of time. More importantly, even if you have zero desire to utilize stock screens within your own approach, it makes sense to look at every stock within your portfolio and figure out whether they would hold up to this basic 5 part test:

1) Do they a have strong sales?

2) Do they have strong earnings?

3) Do you expect both strong earnings and sales to continue in 2008?

4) Is the stock trading at an attractive valuation?

5) Is the stock both outperforming its peers and the overall market?

Especially now, any stock that cannot pass this 5 part test should be reevaluated. And, if you don't know whether the stocks you own (or want to buy) can pass this test, it is time to figure that out.