Extended Tests of Four Popular Stock Screening Strategies

How well have popular stock screens worked over the long term and since 2000? In their December 2024 paper entitled “Formula Investing”, Marcel Schwartz and Matthias Hanauer test four popular stock screening formulas with a common portfolio framework over a long period. These formulas focus on certain firm/stock characteristics, implicitly or explicitly translating stock market anomalies into investable strategies. Specifically:

1. Piotroski’s F-Score sorts stocks on the sum of nine binary signals that distinguish financially weak from financially strong firms among value stocks.
2. Magic Formula sorts stocks on firm return on capital and stock earnings yield to discriminate based on quality and value. 
3. Acquirer’s Multiple sorts stocks solely on enterprise multiple.
4. Conservative Formula sorts stocks on volatility, momentum and net payout yield.

For each formula each quarter, they sort stocks into value-weighted or equal-weighted tenths (deciles) and examine its performance across deciles, focusing on extreme top and bottom deciles. They also regress top-minus-bottom decile returns on widely used asset pricing factors to attribute formula performance to factor exposures. They further evaluate each formula since 2000 using a long-only portfolio of the 40 top-ranked stocks. To ensure liquidity, they exclude stocks with market capitalizations below the 20th percentile of NYSE stocks. While using the latest prices, they lag other firm/stock characteristics by six months to ensure data availability.  Using inputs as available to compute the four formulas for a broad sample of U.S. stocks during July 1963 through December 2022, they find that:

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