Visit each month to read about a different stock screening strategy. Each week we'll reveal more aspects or variations of the featured screening methodology. The All Screens area on the right contains a complete listing of the stock screens and investment "gurus" we are profiling.

Screening for Stock Market Winners

Part 4: Minimum Fundamentals

To further prove that a company's fortunes have turned around, the next two criteria specify a minimum level of company fundamental performance.

The first criterion requires a positive five-year annual growth rate in earnings per share. In the original study, the five-year growth rate was based upon the most recent five years of quarterly data. The growth rates used in the screening are based upon the firm's fiscal-year data, which will not show intra-year turnaround as quickly as the trailing quarterly data. For our screen we require a positive five year growth in earnings per share from continuing operations.

The second criterion requires positive pretax profit margin. This is determined by taking sales and subtracting cost of goods sold, operating expenses, interest expenses, and depreciation and amortization, and then dividing the result by sales. However, our screen substitutes the pretax profit margin with the operating profit margin. The operating margin is less stringent than the pretax profit margin used in the original study, yet it captures much of the same effect. It represents the type of compromise often necessary when implementing a screening strategy. Requiring a positive five-year earnings growth rate or a positive pretax profit alone is not very restrictive criteria. However, they help to screen out some of the very weak firms may be slow in turning around, if ever. It is interesting to note that fundamental measures such as profit margins rose substantially during the major price moves. Requiring a high profit margin as a screening criterion would mean missing at least part of this major price advancement.

Limited Float

This criterion examines the number of shares outstanding, often termed the float. The study found that 90% of the firms had fewer than 20 million shares outstanding before their main price rise. The midpoint or median figure was 5.7 million shares, which doubled during the two years that each "winning" stock was held. This probably indicates many of the firms split their shares during their big price increase.

Some investors look for a stock to have a limited float with the belief that the price move on positive information will be magnified by a limited number of shares available.

Part 3: A Requirement for Momentum Part 5: Price Momentum

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