The Liberated Stock Trader Beat the Market Screener seeks to select stocks that have a significant chance of beating the S&P500 returns. The screener uses growth in free cash flow, and explosive EPS growth. Combining this with Joel Greenblatt’s ROC and Earnings Yield formulas “the Magic Formula” we have a selection of stocks that beat the market 5 of the last 7 years.
In this article, I will discuss the criteria and the methodology that goes into the screener and cover the current results and the results of 7 years of backtesting.
This work has been made possible due to the fabulous work done by the team over at our partner Stock Rover, who have created a stock research and screening platform that won our in-depth Best Stock Screener Review for the last 2 years.
Why is Stock Rover so special when it comes to creating superior stock screeners? Because Stock Rover maintains a clean 10-year historical database of hundreds of vital ratios, calculations, and metrics. This means you can travel back in time to test if your stock selection criteria have worked in the past.
What is Beating the Market?
To beat the market means that your stock investments will need to outperform the underlying index of stocks. In the USA the market to beat is generally the 8% annual return of the S&P500 index. Anyone could beat the market in a single year, but outperforming the market over the long-term is the key challenge.
Beating the market is the nirvana for every investor. Well normally it should be, but many investors realize that it can actually be very difficult to out-perform the stock market’s returns year after year.
The Liberated Stock Trader Beat the Market Screener Performance.
|7 Year Performance||S&P500 Index Jan 1 to Dec 31||Beat the Market Screener||Result|
|Average Yearly Return||13%||22%||Beat|
Results Based on $100,000 Invested
|S&P500 index Returns||Beat the Market Screener|
|Initial Investment||$ 100,000.00||$ 100,000.00|
|2013||$ 129,800.00||$ 149,400.00|
|2014||$ 144,597.20||$ 174,648.60|
|2015||$ 134,475.40||$ 179,189.46|
|2016||$ 147,250.56||$ 220,761.42|
|2017||$ 175,817.17||$ 303,326.19|
|2018||$ 164,916.50||$ 227,797.97|
|2019||$ 212,577.37||$ 334,407.42|
|+57% or +$121,830|
Beat the Market Screener Performance vs S&P500, Present
So far this year to May 15th, 2020 the LST screener has done very well, although only 13 stocks met the criteria, the LST screener has returned 25% versus the S&P500 which has lost 12.7%. This means an outperformance of 12.3%
Beat the Market Screener Performance vs S&P500, 2019
In 2019 as for all the backtested results the clock starts on January 1st and ends on December the 31st. For 2019 the LST screener returned 46.8% versus the S&P500 of 28.9% which is a beat of 17.9%.
Beat the Market Screener Performance vs S&P500, 2018
2018 was the only year in the backtest where the LST Beat the Market Screener lost significantly to the S&P500. While it was a losing year for both the screener and the market in general, the S&P returned -6.2% while the screener lost 24.9%.
Beat the Market Screener Performance vs S&P500, 2017
2017 was another good year for the LST screener beating the market 17.8%. The S&P500 had a solid year returning 19.4%, while the Beat the Market Screener returned 37.4%.
Beat the Market Screener Performance vs S&P500, 2016
2016 was an average year for the market with the S&P500 returning 9.5% while the Beat the Market Screener made a profit of 23.2%.
Beat the Market Screener Performance vs S&P500, 2015
2015 was a battle to make a profit for the system and for the S&P500. While the LST system led the S&P500 for the entire year, the S&P500 made a loss of 0.7%, while the LST BTM Screener squeezed a profit of 2.8%.
Beat the Market Screener Performance vs S&P500, 2014
Although the S&P500 was leading the LST BTM screener for most of the year, in October 2014 things turned around and the selected stocks surged to beat the market again 16.9% vs. 11.4%.
Beat the Market Screener Performance vs S&P500, 2013
2013 was the further year back we could backseat. The main reason for this is we use 3 years of data in the criteria of the screener and Stock Rover maintains a 10-year historical database, thus 7 years of backtesting. 2013 saw the screener return an impressive 49.4% while the S&P500 increased by 29.6%.
How to Beat the Market? Criteria & Screener Methodology
After many months of experimenting with many different investment methodologies, from value investing, margin of safety investing, and dividend/income investing strategies I found they were quite inconsistent.
I decided to start from a blank sheet of paper and use criteria that I believe turn companies into high growth stocks and criteria that have a historical record to enable me to backtest to the hypothesis. Pulling on my 20 years of investing I formulated the following criteria.
The Criteria & Explanation of Logic
- Free Cash Flow – Healthy Companies Have Cash
- EPS Growth – Good Companies Grow Earnings
- Greenblatt Return on Capital – Good Companies Make Great Use of Assets
- 1 Year Return vs. the S&P500 – Great Companies Demonstrate They Can Beat the Market
- EPS Growth Now Greater Than 20% – A Surge in Earnings
- Previous Year EPS Greater Than Zero – They Made a Profit
- Demonstrating Growth Across the Board vs industry Competitors
- Greenblatt Earnings Yield
Free Cash Flow – Healthy Companies Have Cash
Free Cash Flow shows how much cash a company generates after paying to maintain and expand its production. It is calculated by subtracting Capital Expenditure (Cap Ex) from Cash Flow and is for the trailing 12 month period.
Calculation: Free Cash Flow [Previous Calendar Year] > Free Cash Flow [2 Calendar Years Ago]
Cash is king for anyone researching stocks, cash flow growth ensures that a company will not go bankrupt and also that the company has the capital to expand product and grow market share. this calculation ensures the business is on the right track growing free cash, the lifeblood of any business.
EPS Growth – Good Companies Grow Earnings
For a great growth stock, you want to see that earnings per share are growing, year on year and this calculation ensures that over the past 3 years the business has generated increasing earnings per share. A solid methodology made popular by William J. O’Neill in his CAN SLIM Methodology.
Earnings per Share or EPS is calculated as Net Income from continuing operations divided by the weighted average number of shares.
Calculation: EPS [Previous Calendar Year] > EPS [2 Calendar Years Ago] and EPS [2 Calendar Years Ago] > EPS [3 Calendar Years Ago]
Greenblatt Return on Capital – Good Companies Make Great Use of Assets
This variation of Return on Capital takes Earnings before Interest & Taxation (EBIT) as a percent of Net Property, Plant and Equipment (PPandE) plus Current Assets. It is used by Joel Greenblatt in his bestselling book The Little Book That Beats the Market.
This is a key ratio that really works as we are looking for companies whose pre-tax earnings as a percent of their tangible assets are very high.
Calculation: “Greenblatt ROC [Previous Calendar Year] ” > “Greenblatt ROC [2 Calendar Years Ago] ”
1 Year Return vs. the S&P500 – Great Companies Demonstrate They Can Beat the Market
This is a great function of Stock Rover, you can screen on companies whose stock price outperformed the S&P500 in any of the previous 10 years. So for this Beat the Market Screener I have chosen to filter on companies whose stock price has outperformed the stock market by 15% in the previous calendar year.
Calculation: “1-Year Return vs S&P 500 [Previous Calendar Year] ” >15
The reason this is included in the screener is that you want to buy stock in companies that have been recognized by Wall Street and the investment banks and have money flowing into the stock. For any reasonably capitalized company beating the market means you are recognized as a future top performer and are seeing price growth.
Yes, 15% is aggressive and you can, of course, adjust this in Stock Rover perhaps to 10%, when you import the screener into your view. Lowering this will give you more stocks to choose from.
EPS Growth Now Greater Than 20% – A Surge in Earnings
We now return to the earnings equation. This calculation is designed to ensure in the most recent calendar year we have seen powerful growth in earnings per share of 20% or greater.
Wall Street recognizes very few things well, but EPS growth is what drives price growth. Being on the Wall Street Radar means price growth. In addition, any company making serious increases in earnings per share means their business is going well.
Calculation: “EPS 1-Year Chg (%) [Now] ” >20
Previous Year EPS Greater Than Zero – They Made a Profit
A simple calculation to ensure that a company actually made a profit in the previous calendar year.
Calculation: “EPS [Y1] ” >0
Demonstrating Growth Across the Board vs Industry Competitors
One of the great things about Stock Rover is its proprietary rating system.
Stock Rover ranks companies on a variety of scores including:
- Value Score: EV / EBITDA, P/E, EPS Predictability, Price / Tangible Book, and Price / Sales. The Price / Tangible Book and Price / Sales values are compared within a sector whereas the other metrics are compared across all stocks with adequate data. The best companies score a 100 and the worst score a 0.
- Quality Score: Compares profitability and balance sheet metrics to find high-quality companies. Our computation includes ROIC, Net Margin, Gross Margin, Interest Coverage, and Debt / Equity ratio values. The best companies score a 100 and the worst score a 0.
- Sentiment Score: sentiment score finds stocks that the market favors by comparing Short Interest Ratios, returns over several periods within the last year, Price vs. 52-wk High, Days Since 52-wk High, and MACD signals. The best companies score a 100 and the worst score a 0.
- Altman Z-Score: This popular credit-strength measure aims to show how likely a company is to go bankrupt. Risky companies have a score below 1.8 and solid companies have a score of 3.0 or higher. Financial institutions like banks are not scored.
- Poitroski Score: The Piotroski score determines the financial strength of a company based on 9 criteria. Companies with a score of 8 or 9 are considered strong and a score between 0 and 2 indicates a weak company.
- Growth Score: The Stock Rover growth score looks at the 5-year history and also the forward estimates for EBITDA, Sales, and EPS growth to rank the best companies across all stocks. The best companies score a 100 and the worst score a 0.
Calculation: Stock Rover Growth Score: Ranked on the Highest Growth Score
Greenblatt Earnings Yield
This variation of earnings yield compares Earnings Before Interest & Taxation (EBIT) to Enterprise Value. It is used by Joel Greenblatt in his bestselling book The Little Book That Beats the Market
Calculation: “Greenblatt Earnings Yield [Y1] ” > “Greenblatt Earnings Yield [Y2] ”
The Greenblatt Earnings Yield is a calculation not on the Earnings per Share but on the Earnings before Tax as a percentage of the entire value of a company. The higher the yield the better the company.
How To Get This Screener In Stock Rover
There is only one Stock Screener and Stock Analysis platform on the market that will enable you to implement our Beat the Market Screener.
The best tool for the job is the Winner of our Top 10 Best Stock Screeners Comparison – Stock Rover. Also, Stock Rover won our Best Value Investing Stock Screener
5 Easy Steps To Setup Your Beat the Market Scanner in Stock Rover.
Step 1 – Get Stock Rover
Sign Up For A Free 14 Day Trial of Stock Rover (no card required), this will give you the Premium Plus Service for free for 14 days. You need the Premium Plus Service to access the awesome Fair Value and Margin of Safety criteria, exclusive to Stock Rover.
Step 2 – Locate The Screener
Once you have registered and logged in to Stock Rover, locate Screeners from the navigation menu, hover over it with your mouse and select the drop-down arrow then select Browse Screener Library.
Screeners -> Browse Screener Library
This will take you to a huge selection of expertly curated Stock Screener templates.
Step 3 – Import The Screener
Scroll down to the Liberated Stock Trader Beat the Market Screener, select the checkbox to the right, and finally click the Import Item Selected Button.
Locate Liberated Stock Trader Beat the Market Screener -> Click Checkbox -> Import Items
Step 4 – Import The Column View
Step 5 – Back Test the Screener (Optional)
If you want to, you can also import the backtested screeners for 2018 and 2019.
- Follow the same procedure in Step 3, but select the Beat the Market Screener Y2 2019 and Y3 2018.
2. Once imported, right-click the screener and select “Compare in Chart”
3. In the chart, make sure to select “Compare to” -> S&P500
4. Finally, ensure to select the historical date range that matched the screener. In this case 01/01/2019 to 12/31/2019.
Here you will see for 2019 the BTM Screener gained 42.9% vs the S&P500 28.9%.
Important Notes on the Screener
Final Number of Stocks in Selection.
Depending on the year and the performance of companies on the stock market you may have a final selection in the screener of 15 stocks or 200 stocks. This system’s backtesting and reported performance are based on investing an equal dollar amount in all of the stocks on the first trading day of the year and selling them all on the final trading day of the year. However, if you are investing $2 million in 13 stocks that might represent diversification risk. If you have $2,000 to invest and the selection in the screener is 200 stocks, that is simply impractical. use your judgment, research the stocks you want to invest in, and loosen or tighten the screener criteria to meet your personal objectives.
As with any stock market investing system, nothing is guaranteed to work in the future as it did in the past. In fact, the more institutions that utilize a system the more ineffective it becomes. So this beat the market screener and LiberatedStockTrader.com accept no liability for your use of this work. Liberated Stock Trader does not recommend the purchase of specific stocks and accepts no liability for any losses incurred. By using this or any other published article for investing purposes you are agreeing to our disclaimer.
However, to date (2020) this system has proven very effective, but there is no guarantee of future performance.