Momentum screeners and their backtested results
Some of my favorite screeners I created on EquitiesLabs.com are based on the mid- and long-term Awesome Oscillator (AO) values, together with some 4-5 other criteria, both fundamental and technical. This article will combine some of the stocks which were proposed by both screeners: the weekly AO setting for mid-term opportunities and the monthly AO setting for long-term opportunities.
Backtest for the weekly AO setting produced the best results when 5 top stocks are purchased in March, September, November, and December for the 1-year holding period. In actuality, the backtest for purchases made in October gives a result almost identical to the S&P 500 curve and similar annual returns.
If we apply this screener to only the four best months, the 10-year returns oscillate between 412% (December picks) and 891% (March picks), under the condition of holding on average 5 positions starting from 2009.
The monthly AO screener has the best backtesting results in two different settings: the first is purchasing top 2 to 5 stocks in months March, June, September, and December and rebalancing quarterly; the second is purchasing the same number of stocks in the same months but for the 1-year holding period.
See here the graph of performance for the last 10 years, had I followed the first strategy of re-balancing the portfolio quarterly.
1500+ % portfolio performance gives water in the mouth, doesn’t it?
For trading junkies like me, the 3-month holding period is a temptation that I am trying to resist. Especially when I factored in a minimum of 1% commissions at every transaction – the terrible results woke me up from the dream. But yearly re-balancing seems to be a more sensible approach, resulting in returns that oscillate between 385% (December picks) and 875% (March picks), under the condition of holding on average 5 positions starting from 2009. Even if the return is cut by 75% in the “worst” of cases, at least I would not be paying the broker.
You could ask a question about why I am running these screeners in October if this was not a top-performing month for any of the screeners mentioned above. The answer is curiosity. Backtests show us only the past. Certainly, high returns are very attractive on paper. But in the current moment, we are dealing with new and different companies and a different economic situation. Also, the screeners are based on a technical characteristic, which fluctuates at a higher frequency than the fundamental measures. Therefore, it will happen more often to have a new company passing a technical threshold, because the calculations are rolling, like moving averages. Surely, I do not recommend to treat screeners’ recommendations and backtests’ results like a holy book, but only as the beginning of your research.
Stocks with a mid-term momentum
Steelcase Inc. (SCS) is a furniture and interior products company, as we learn from Finviz.com, which sells its storage, tables, seating and walls solutions under brands as the Steelcase, Coalesse, Turnstone, Smith System, AMQ, Orangebox, Designtex, and PolyVision. Its drive for innovation has been honored in September by Fast Company’s 2019 Innovation by Design Award for SILQ™, a Steelcase chair that transforms seating through design. Their collections of furniture and accessories for office activities, Steelcase Flex Collection and Steelcase Roam, received top honors at the 2019 Best of NeoCon Awards. The latter was developed for the Microsoft Surface Hub 2S. Their other brands also have gathered multiple accolades this year. This excellent advertisement resulted in increased revenues and earnings, which translated into beating the analysts’ expectations for the second-quarter earnings. As we can see below, the stock has entered a positive territory above zero line of the weekly period Awesome Oscillator after the earnings announcement on 20 September. We are seeing the effects of the current market turbulence, though.
The stock is also attractive from the point of view of the valuation. It is currently trading below the 5-years average for Price to Sales, Price to Earnings, Price to Forward Earnings, Price to Cash Flow and Price to Book. The company also offers a 3.15% dividend yield.
What I like about this company is that it is driven by research and development. Their expenses on R&D have grown from $35.8 million in 2017 to $53.7 this year. The design awards received confirm that this is a company that creates high added-value products and as such could be treated as discretionary.
The 10-year performance of the stock is actually pretty close to the performance of S&P 500, with a similar annualized return of 12-13 %. This year alone, SCS returned nearly 16%, while S&P 500 returned nearly 17%.
UMH Properties, Inc. (UMH) is a REIT engaged in the business of ownership and operation of manufactured home communities. The company banks on the demand for affordable housing and the increase in income among blue-collar workers. They search for sites that have a high potential for business development which will drive the influx of new workers, e.g. their latest investments in the site in Perrysburg, Ohio, near a Fiat Chrysler manufacturing plant, a large Walgreens distribution center, a brand-new First Solar manufacturing plant and a recently announced 700,000-square-foot fulfillment center to be developed for Amazon. In August they closed the acquisition of Northtowne Meadows, a high-quality community, situated in Erie, MI, for roughly $25.2 million. The company financed this and other recent purchases from the capital ($100 million) raised through a preferred equity offering in the second quarter. This transaction, together with the reduction in the dividend income from the REIT securities portfolio, had a negative impact on the EPS. However, the management foresees that within the next 2-3 years the new acquisitions will become accretive to the earnings. The company plans to reduce the cost of capital by calling the 8% Series B Preferred Stock in 2020.
As we can see below, the stock has entered a positive territory above zero line of the weekly period Awesome Oscillator. Also, the KST indicator had crossed above its signal line 2 weeks before AO became positive, signaling the beginning of the uptrend. The problems of the market seem not to touch UMH and the good karma seems to continue for them.
However, the stock is not attractive from the point of view of the valuation. It is currently trading above the 5-years average for Price to Sales, Price to Earnings, Price to Forward Earnings, Price to Cash Flow and Price to Book. The company is also significantly indebted, with Debt to Equity ratio of 2.4, and with the negative interest coverage. Therefore, a word of caution is needed.
The 10-year performance of the stock has underperformed the market. It has return one-third of what the index produced: 82% to 251%, respectively.
Nevertheless, this year the company has outperformed the market by 6 percentage points: 25% to 19%, respectively.
Stocks with a long-term momentum
City Office REIT Inc. (CIO) is a REIT specializing in top-range office properties in metropolitan areas in the Southern and Western states of the US, although they are located in Vancouver, Canada. As they describe themselves int the annual report:
“we focus primarily on Class A and B properties with a purchase price between $25 million and $100 million and expected capitalization rates generally between seven and eight percent.[… ] At December 31, 2018, we owned 64 office buildings with a total of approximately 5.7 million square feet of net rentable area (“NRA”) in the metropolitan areas of Dallas, Denver, Orlando, Phoenix, Portland, San Diego, and Tampa.”
Twenty of these buildings were purchased in 2018 alone, for the amount of $260.1 million. Among office REITs, CIO is one of the smallest by market capitalization, with a little above $550 million. They enjoy, however, one of the highest annual growth rate of sales for the last 5 years among 24-peer group reported by Finviz, with 44%. This makes CIO also one of the cheapest by Price to Sales ratio. Also, their EPS growth rate for the last 5 years is amazing, 30% annually. This number is, nevertheless, a bit misleading because only in 2017 did they become profitable. This is still a young company, existing only since 2013. With positive operating cash flow since the start, they have been able to double their book value per share since 2014. The dividend yield offered by CIO is 6.7%.
From the chart below with monthly bars, it looks like City Office REIT entered a positive territory on the monthly AO chart in September (on the middle panel, the second green bar from the right). However, my screener showed it only at the beginning of October, which I would explain by the rolling nature of the calculations done by the settings of my screener. The price is above the moving average and KST line has long crossed above its signal.
I find this stock very interesting for two reasons: it is a pretty new company, they have not had yet a chance to prove their value, nor fully take advantage of a full economic cycle, including a downturn. Second, they invest in office in affluent areas, and even in times of financial crises, luxury pays off.
As for the 10-year performance, CIO has had a positive return but it was far inferior to the one of S&P 500 index. However, since the beginning of 2019, the stock returned 33%, a double of what S&P 500 returned with 17%.
Cavco Industries Inc. (CVCO) is a $1.67 billion market-cap producer of manufactured houses with operations divided into segments of factory-built housing and financial services. The latter segment is providing mortgage lending, commercial loans, and insurances. Their latest earnings report was very positive Year over Year, indicating the increased revenues thanks to demand for higher price-tags houses while operating income was helped by lower commodity prices. They finalized in August the acquisition of a company called Destiny Industries, which provided them with a manufacturing plant in Georgia. What I like about Cavco as an operation is the fact that they have achieved amazing revenue and EPS compounded annual growth rates for the last 10 years, 24.7% and 59% respectively. Also, among residential construction peers on Finviz.com they have the highest expected EPS annual growth rate for the next 5 years, 30%. Their level of debt is also very low, the second-lowest among peers with the ratio Debt to Equity of only 0.06. The only worrying issue is the SEC inquiry started on August 20, 2018, on the matter of trading in the stock of another public company by Joseph Stegmayer, the Company’s then Chairman, President and Chief Executive Officer. Stegmeyer stepped down in November 2018. The Board appointed Daniel Urness, VP and CFO, in his place. As of the last earnings call, the company has borne $800.000 of costs related to the investigation.
As for the technical analysis of the stock, and like in the case of City Office REIT, the chart indicates that Cavco entered a long-term positive territory in September, not October. I think it’s only a minor question of visual presentation. What interests me more on this chart is that the price above the moving average and the upward direction of the KST line which is approaching its signal line to cross above it.
When it comes to the 10-year performance, CVCO crushed S&P 500 with the return of 472% vs. 244% of the index. And this happened despite the dramatic collapse of the share price with the moment of the SEC inquiry announcement. We could probably assume that the company is on its recovery from the fall.
Just this year alone, CVCO returned 43%, while S&P500 only nearly 17%.
One of the strongest conclusions I may draw from writing this article is that there always exist interesting opportunities in the market that might be flying under the radar. They get lost in the noise made by big headlines. Although, what is curious, all four stocks belong to real estate, housing, and office theme. The second conclusion is that I still need to make these two screeners more robust, as to reduce the variance among results in relation to when the position is started. I prefer to have more stable results no matter when I buy and how many top positions are chosen. I am curious if you have had similar experiences related to your backtests and how you use them.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.