Screening for Value: An Earnings-Based Screen

Over the past few weeks, I have generated value investing ideas using the Stockopedia screening tools. This week that quest continues with an earnings-based screen.

Most of the mainstream academic finance research has focused on the Price-to-Book metric, which was the focus of my last screen. However, it has been known for some time that using earnings-based metrics may overcome some of the issues that Price-to-Book faces as a measure of value. Most of the published data has come from “quant practitioners,” who use their research to manage money via quantitative strategies. While I am not aiming to generate a purely quantitative screen, understanding the history of this research helps ensure I pick the right screening factors.

Earnings-Based Value Metrics – A Brief History

Perhaps the best-known of the early quant practitioners are David Dremen and James O’Shaughnessy. In 1980, Dremen wrote a book called Contrarian Investment Strategy, which highlighted that a low Price-to-Earnings strategy was the best-documented way to beat the market. In 1998, he followed this up with a book called Contrariarian Investment Strategies: Beating the Market by Going Against the Crowd. He looked at more up-to-date data for Price/Earnings, Price/Cash Flow, Price/Book Value, and Dividend Yield, finding Price/Earnings to...