ROE screen

Stocks A to Z
1

Mongofitch has posted about a number of mechanical portfolios that have outperformed the S&P 500 index. I thought I’d screen for one that went something like this: Choose the 25 (or more) companies in the ValueLine database of 1700 companies that have the highest ROE and then drop a holding from the portfolio when it falls below number 50. I don’t recall whether Mungofitch used trailing twelve month ROE or some multi-year average ROE. I looked at trailing five year. I don’t subscribe to ValueLine, but I used Morningstar to generate a similar portfolio. Screening for US listed stocks with $8B market cap or greater gave 1695 stocks. Further screening for companies with 25% or greater ROE in each of the last five years resulted in the following list of 61 stocks. 5-year average ROE ranged from 29% to 1449%. Is this close to Mungofitch’s portfolio?

3M Co
Apple Inc
Applied Materials Inc
Automatic Data Processing Inc
Avery Dennison Corp
Booz Allen Hamilton Holding Corp Class A
Broadridge Financial Solutions Inc
Brown-Forman Corp Registered Shs -B- Non Vtg
C.H. Robinson Worldwide Inc
CDW Corp
Celanese Corp Class A
Cheniere Energy Partners LP
Clorox Co
Copart Inc
Dollar General Corp
Expeditors International of Washington Inc
FactSet Research Systems Inc
Fair Isaac Corp
Fastenal Co
Generac Holdings Inc
General Mills Inc
Graco Inc
Illinois Tool Works Inc
International Business Machines Corp
Intuit Inc
Kellogg Co
KLA Corp
Lam Research Corp
Lockheed Martin Corp
LPL Financial Holdings Inc
Magellan Midstream Partners LP
Manhattan Associates Inc
MarketAxess Holdings Inc
Mastercard Inc Class A
Mettler-Toledo International Inc
Northrop Grumman Corp
NVIDIA Corp
NVR Inc
O’Reilly Automotive Inc
Omnicom Group Inc
Paychex Inc
PepsiCo Inc
Pool Corp
Robert Half International Inc
Rollins Inc
S&P Global Inc
SEI Investments Co
Sherwin-Williams Co
Simon Property Group Inc
T. Rowe Price Group Inc
Target Corp
Texas Instruments Inc
Texas Pacific Land Corp
The Hershey Co
The Toro Co
Tractor Supply Co
Union Pacific Corp
United Parcel Service Inc Class B
Verizon Communications Inc
W.W. Grainger Inc
Zoetis Inc Class A

Following each ticker below are the following metrics: Sorry for the poor formatting. It should look like a spreadsheet with columns for the metrics, but it didn’t paste that way. I hope this is useful.

Current Price
Morningstar Fair Value
Price/Fair Value
Price/Earnings Forward
Price/Sales
Price/Book TTM
Dividend Yield TTM
% ROE 5 Year
% ROA 5 Year
Debt to Equity Latest Qtr
% Revenue Growth 3 Year
% EPS Growth 3 Year
mil$ Market Cap

MMM
148.58
192.00
0.77
14.29
2.43
5.56
3.99
45.99
12.71
1.11
2.57
4.41
83,700.03
AAPL
167.66
130.00
1.29
27.93
7.50
38.48
0.52
72.66
18.20
1.48
11.26
23.48
2,767,646.80
AMAT
114.56
142.00
0.81
13.91
4.26
8.39
0.84
41.69
18.93
0.48
11.35
29.31
99,739.04
ADP
231.06
222.00
1.04
31.06
6.42
19.23
1.71
45.21
5.29
0.66
4.42
12.62
97,097.68
AVY
173.49
131.00
1.32
18.25
1.71
7.33
1.57
37.64
8.16
1.45
5.51
18.70
14,117.76
BAH
87.57
85.46
1.02

1.46
10.80
1.76
59.62
10.13
2.80
8.41
29.12
11,559.81
BR
154.07
175.00
0.88
21.05
3.37
10.24
1.62
37.63
11.30
2.52
4.87
9.31
17,902.84
BF.B
68.24
77.00
0.89
34.84
8.72
12.94
1.08
48.01
15.30
0.82
2.14
8.30
31,857.38
CHRW
101.41
96.00
1.06
15.87
0.58
6.28
2.09
37.75
13.00
0.81
11.58
10.08
12,683.58
CDW
171.65
166.83
1.03
18.45
1.16
32.74
1.05
72.39
8.84
9.83
8.63
18.88
23,107.21
CE
143.97
150.00
0.96
9.00
1.88
3.68
1.89
43.55
13.46
0.81
6.06
23.99
15,444.62
CQP
56.77
50.00
1.14
13.93
3.02
39.74
4.76
160.35
5.72
24.05
13.65
6.12
28,533.72
CLX
146.45
161.00
0.91
25.84
2.57
57.07
3.13
132.04
15.31
6.94
6.23
-3.76
17,863.25
CPRT
121.00
119.84
1.01
25.77
9.04
6.89
0.00
34.49
22.45
0.12
14.25
31.12
28,185.11
DG
243.83
203.00
1.20
21.28
1.70
9.02
0.74
31.00
10.94
2.09
10.12
19.43
56,493.59
EXPD
96.74
103.00
0.94
13.35
1.00
4.62
1.20
31.90
18.27
0.11
26.63
33.45
16,164.01
FDS
425.60
340.00
1.25
33.11
9.69
13.06
0.77
49.08
20.56
0.66
5.63
15.18
15,884.69
FICO
407.40
394.22
1.03
25.84
8.73
-19.72
0.00
114.48
15.25

9.59
48.89
10,612.27
FAST
57.69
43.00
1.34
32.36
5.51
10.86
1.99
31.72
22.32
0.16
6.58
6.89
33,043.31
GNRC
264.90
301.00
0.88
22.68
4.34
7.29
0.00
30.69
10.62
0.56
22.69
32.85
16,134.92
GIS
70.43
67.00
1.05
17.86
2.32
4.32
2.90
31.73
7.23
1.12
4.82
1.27
42,365.67
GGG
66.68
76.00
0.88
24.81
5.78
6.53
1.16
36.38
20.54
0.06
6.33
8.55
11,149.59
ITW
199.81
205.00
0.97
21.79
4.35
17.10
2.40
66.20
14.87
1.94
-0.71
3.84
62,010.39
IBM
125.98
126.00
1.00
12.36
1.98
5.97
5.21
37.81
5.24
2.51
-10.35
-18.18
112,945.42
INTU
461.62
511.00
0.90
33.67
11.02
8.16
0.57
52.47
22.71
0.46
16.93
14.10
127,319.40
K
67.95
87.00
0.78
16.61
1.65
6.21
3.41
47.85
7.32
1.82
1.54
4.17
23,095.21
KLAC
330.25
396.00
0.83
14.14
6.20
12.24
1.23
63.15
16.54
0.86
19.67
37.89
49,590.54
LRCX
467.00
720.00
0.65
12.00
3.97
9.87
1.24
43.00
18.76
0.77
9.71
26.88
63,947.05
LMT
467.55
419.00
1.12
18.38
1.94
11.45
2.31
480.50
11.02
1.06
7.64
8.97
125,503.83
LPLA
201.04
193.00
1.04
22.42
7.02
9.66
0.50
39.87
7.32
1.77
8.84
5.10
16,152.51
MMP
50.00
52.00
0.96
11.88
4.13
4.74
8.26
42.07
12.86
2.22
-1.11
-10.12
10,912.10
MANH
133.15
142.00
0.94
64.94
12.99
33.73
0.00
57.46
27.95
0.09
5.88
2.87
8,452.41
MKTX
273.95
360.00
0.76
37.04
14.56
9.71
0.98
30.24
24.56
0.08
17.08
14.00
10,110.72
MA
345.80
369.00
0.94
33.44
18.09
46.02
0.54
110.65
23.95
1.79
8.10
16.08
336,483.65
MTD
1,313.77
770.00
1.71
36.76
8.08
169.82
0.00
157.56
20.62
9.22
8.19
18.14
29,110.86
NOC
463.28
329.00
1.41
18.52
2.10
5.59
1.36
38.81
8.96
1.11
5.83
33.04
72,312.43
NVDA
215.04
200.00
1.08
38.46
19.87
19.90
0.07
39.17
25.29
0.44
31.95
32.43
529,579.44
NVR
4,352.02
4,661.60
0.93
9.64
1.88
4.90
0.00
39.92
22.05
0.53
7.68
18.05
14,715.69
ORLY
717.55
570.00
1.26
21.65
3.72
-709.87
0.00
1,449.70
16.31

11.80
24.54
47,151.09
OMC
77.92
90.00
0.87
12.29
1.18
4.91
3.59
44.53
4.71
2.03
-2.23
3.85
16,073.78
PAYX
136.59
110.00
1.24
34.13
11.00
14.98
1.93
42.54
12.66
0.27
6.30
3.28
49,221.28
PEP
173.30
154.00
1.13
25.97
3.04
15.00
2.48
58.99
9.62
2.25
7.12
-14.49
240,689.18
POOL
410.97
373.71
1.10

3.11
15.24
0.78
84.59
21.29
1.26
20.88
41.64
16,328.71
RHI
111.01
85.00
1.31
19.65
1.91
8.88
1.41
36.02
18.97
0.13
3.66
14.51
12,254.13
ROL
35.43
27.70
1.28
45.66
7.16
16.07
1.02
30.84
17.47
0.29
10.00
14.74
17,384.08
SPGI
397.31
430.00
0.92
29.67
11.34
66.46
0.78
321.47
19.84
2.27
9.86
17.41
135,055.86
SEIC
57.93
74.00
0.78
13.77
4.30
4.28
1.33
29.65
23.77
0.04
5.71
6.66
7,962.62
SHW
256.95
195.00
1.32
27.70
3.39
27.03
0.88
49.38
9.15
4.13
4.39
21.52
65,883.63
SPG
126.18
160.00
0.79
23.26
8.06
12.42
4.91
60.91
6.11
7.63
-3.22
-4.57
41,235.16
TROW
143.87
195.00
0.74
11.17
4.31
3.65
3.09
31.37
23.86
0.03
12.61
21.75
32,958.29
TGT
231.34
188.00
1.23
15.85
1.09
8.41
1.46
32.80
9.06
1.24
12.05
36.86
107,922.82
TXN
173.00
172.00
1.01
18.83
8.88
12.04
2.51
55.79
29.37
0.57
5.14
13.90
160,642.09
TPL
1,406.57
1,289.10
1.09
24.75
24.45
16.91
0.80
83.39
64.96
0.00
14.52
8.95
11,017.70
HSY
226.02
155.00
1.46
28.49
5.28
17.01
1.55
78.13
15.27
1.59
4.81
8.41
46,890.35
TTC
86.54
83.79
1.03
21.65
2.34
8.16
1.30
38.72
15.45
0.94
14.78
14.78
9,138.55
TSCO
236.69
168.00
1.41
25.19
2.16
13.34
1.05
38.96
14.43
1.79
17.19
25.94
26,722.29
UNP
245.06
206.00
1.19
21.14
7.43
10.96
1.84
35.46
11.57
2.05
-1.52
7.95
155,227.70
UPS
187.89
186.00
1.01
14.66
1.67
11.30
2.44
263.96
10.30
1.60
10.63
38.63
161,126.43
VZ
53.67
59.00
0.91
9.94
1.66
2.75
4.75
42.94
7.44
2.04
0.70
12.26
224,452.12
GWW
523.50
379.00
1.38
21.51
2.12
14.41
1.24
43.07
13.04
1.44
5.09
13.06
27,001.66
ZTS
187.91
186.00
1.01
36.50
11.25
19.03
0.57
57.23
13.33
1.48
10.11
13.38
86,441.22

1 Like
2

Not that I use it but there was an interesting interview about the Magic formula portfolio with Joel Greenblatt. Apparently it’s underperformed the S&P for the last 11 years?

3

I think using

 ...

you can present your table so that it appears exactly as you format it.

Can you further screen to show the top 20 with the highest 3-yr revenue growth? 5-yr would be better, but 3-yr would do if that’s all you have.

4

There are lots of ways to skin a cat.

But, for the super simple screen you mention, top 50 by Return on Shareholders’ equity, I can offer the following info:

The field from Value Line “Return on Shareholders Equity” is updated only annually…but works best.
Don’t ask me why. I think it might be because they do some adjustments to take out extraordinary items which they don’t do with the quarterly figure “ROE Latest Qtr”.

For your specific strategy, top 25.
Hold any pick till it drops out of the top 50, then replace it with the highest ranked one you don’t already own.
Monthly holds. Everything rebalanced to equal weight monthly (makes the test simple, but not actually needed that often–annually is fine)

Returns Jan 1999 through March 2022 inclusive (23.25 years):

                                                    CAGR without trading costs     With trading costs
Return on Shareholders Equity (annual updates)                  16.01%                  15.75%
ROE Latest Qtr (quarterly updates)                              11.71%                  11.00%
(Current EPS * Commons shares Outstanding)/Shareholders Equity  14.72%                  14.46%
S&P 500 total return                                             7.77%

This is an unusually good result, since the S&P did very badly 2000-2002.
The advantage is not usually anywhere near that big.
Note that the loss due to trading costs is quite a bit bigger with the figure that gets updated quarterly: more changes in the sort order, more trades.

And in fact the S&P has done so well recently, there is no advantage at all for shorter time frames ending this spring.
The best strategy above (the first one, with trading costs) returned 0.7% less than the S&P 500 in the last ten years.
I believe this result is ALSO atypical. In the “typical” few year stretch–not wildly good for the S&P, not wildly bad–there is a small advantage.
Also over the long haul, it seems.

A test of the first strategy above (the annual ROE figure, with friction) beat the S&P 500 by 4.07% in the last 36.25 years.
If you managed half that long run advantage in real life, you’d be doing very well.
Real life is never like the backtest.

Another interesting note: ROE is basically earnings divided by book value. Bigger is better, right?
But what if book value is negative? These can be very good companies.
But positive earnings divided by negative book gives a negative number, so sorting on ROE will put them last.
A bunch of stocks have positive current earnings, positive forward estimated earnings, but negative book value.
They are usually a good bet, statistically: an infinite ROE, in effect.
To narrow it down to a fixed number of stocks, a final sort on projected earnings growth or trailing 5 year sales growth is nice.
A 15 stock portfolio from that “positive earnings, negative book” group has beat the S&P by something like 5.8-7.4%/year since the credit crunch.
These picks will never appear in the screen above.

Anyway, if this is of interest, here are the current top-ROE stocks in the Value Line set.
Using the data field updated annually, “Return on Shareholders Equity”, and of course it includes no negative-book picks.
(drives me crazy there is no apostrophe in the field name, but life is difficult on all of us)

Ticker    Company Name              Return on Shareholders Equity
GDDY      GoDaddy Inc.                          296.57
ORCL      Oracle Corp.                          269.66
VVV       Valvoline Inc.                        264.44
DELL      Dell Technologies                     248.20
CLX       Clorox Co.                            224.33
CQP       Cheniere Energy Part.                 219.48
STX       Seagate Technology plc                218.85
TPX       Tempur Sealy Int'l                    218.75
IT        Gartner Inc.                          213.86
CWH       Camping World Holdings                202.35
SEE       Sealed Air                            197.50
TEN       Tenneco Inc.                          192.94
WAT       Waters Corp.                          188.50
HRB       Block (H&R)                           177.92
SPGI      S&P Global                            162.94
AAPL      Apple Inc.                            150.07
BCO       Brink's (The) Co.                     148.13
ABBV      AbbVie Inc.                           147.25
AMGN      Amgen                                 146.26
CDW       CDW Corp.                             140.08
NTAP      NetApp Inc.                           133.86
DVA       DaVita Inc.                           132.85
BJ        BJ's Wholesale Club                   131.89
ADSK      Autodesk Inc.                         125.13
CTXS      Citrix Sys.                           122.88
BHVN      Biohaven Pharma.                      114.49
MA        MasterCard Inc.                       113.96
LPX       Louisiana-Pacific                     111.49
CHH       Choice Hotels Int'l                   108.67
IDXX      IDEXX Labs.                           107.95
RH        RH                                    106.39
NTNX      Nutanix Inc.                          102.19
QCOM      Qualcomm Inc.                          98.60
SWBI      Smith & Wesson Brands                  94.39
HBI       Hanesbrands Inc.                       91.77
CAH       Cardinal Health                        91.40
SHW       Sherwin-Williams                       89.32
PLCE      Children's Place                       88.36
MRNA      Moderna Inc.                           86.26
SBH       Sally Beauty                           85.43
MCO       Moody's Corp.                          84.67
LLY       Lilly (Eli)                            82.82
BKE       Buckle (The) Inc.                      81.43
CHDN      Churchill Downs                        81.19
MED       Medifast Inc.                          81.01
ETSY      Etsy Inc.                              78.50
MAR       Marriott Int'l                         77.72
FTNT      Fortinet Inc.                          77.62
THRY      Thryv Holdings                         75.83
BURL      Burlington Stores                      75.46
ITW       Illinois Tool Works                    74.31
AAL       Amer. Airlines                         73.50
DKS       Dick's Sporting Goods                  73.40
ENR       Energizer Holdings                     71.80
VALE      Vale S.A. ADR                          71.75
LMT       Lockheed Martin                        69.41
ATKR      Atkore Inc.                            67.98
WSM       Williams-Sonoma                        67.68
KLAC      KLA Corp.                              66.73
NVO       Novo Nordisk ADR                       66.56
LW        Lamb Weston Holdings                   66.12
AON       Aon plc                                65.40
LRCX      Lam Research                           64.84
ACI       Albertsons Companies                   64.69
SUN       Sunoco LP                              64.61
ULTA      Ulta Beauty                            64.20
ALLE      Allegion plc                           61.83
NRG       NRG Energy                             60.75
POOL      Pool Corp.                             60.72
MRK       Merck & Co.                            59.57
AJRD      Aerojet Rocketdyne                     59.27
TXN       Texas Instruments                      58.26
AN        AutoNation Inc.                        57.23
CNR       Cornerstone Building                   55.94
GWW       Grainger (W.W.)                        55.65
CLF       Cleveland-Cliffs Inc.                  54.37
PEP       PepsiCo Inc.                           54.15
SLM       SLM Corporation                        53.98
HSY       Hershey Co.                            53.58
CCK       Crown Holdings                         53.45
BCC       Boise Cascade                          52.67
CACC      Credit Acceptance                      52.53
SMG       Scotts Miracle-Gro                     52.16
TGT       Target Corp.                           52.07
CAL       Caleres Inc.                           51.51
AMAT      Applied Materials                      51.33
MGY       Magnolia Oil & Gas                     51.09
STLD      Steel Dynamics                         50.97
PBI       Pitney Bowes                           50.79
BAH       Booz Allen Hamilton                    50.76
TSCO      Tractor Supply                         49.78
ICPT      Intercept Pharmac.                     49.69
CHE       Chemed Corp.                           49.48
ZTS       Zoetis Inc.                            49.30
AMCX      AMC Networks                           49.25
MUSA      Murphy USA Inc.                        49.17
MMP       Magellan Midstream                     49.07
FIZZ      National Beverage                      48.91
NUE       Nucor Corp.                            48.71
AMP       Ameriprise Fin'l                       48.54

Jim

7 Likes
5

If you want to format tables here at the Fool nicely (and you use a compatible version of Excel),
I recommend the macro “ExportText.xls” https://sites.google.com/site/thegreatradish/home

Have that file open.
Highlight the rectangle of cells you want to format, press Alt-F8, answer the questions.
It will give you a text window to paste into your post.
It does alignment, justification and bold/italic formatting, bracketed with the
tags.

It’s one of the two macro programs I used most often.
Alas, the author, the Great Radish (Phil), died suddenly in 2017 after 18 years on the board, but is fondly remembered.
Happily his site is still up.

Jim

5 Likes
6

“Can you further screen to show the top 20 with the highest 3-yr revenue growth? 5-yr would be better, but 3-yr would do if that’s all you have.”

In Morningstar I can sort the portfolio by 3-year revenue growth, but I’m still struggling with the format in the post, in spite of the attempts by people here to help me.

7

“The field from Value Line “Return on Shareholders Equity” is updated only annually…but works best.”

Thank you, Jim. In Morningstar I can screen for ROE year-1, which I take to mean 2021. In the portfolio spreadsheet I can include a column for ttm ROE.

I’d like to track a portfolio of this type, or similar, either on paper or in an IRA. Do you suspect that screening for the top companies by ROE year-1 would work better than ROE 5-year average? Also how much does rebalancing monthly add to returns? It would be easier for me to rebalance less frequently, or not to rebalance at all. Would you add a second metric for constructing the portfolio, such as 3-year revenue growth?

Thank you for your help.

rrr12345

8

I’d like to track a portfolio of this type, or similar, either on paper or in an IRA. Do you suspect that screening for the top companies by ROE year-1 would work better than ROE 5-year average?

Sadly, I have access to a backtester with 1-year ROE and a screener with 5-year-average ROE, but neither does both.
So I can’t do the test.

If my testing database had both, and having done a LOT of backtesting and data mining in my day,
my gut feel would be to require a minimum average ROE (above X% or top N) without eliminating too many firms,
then the main sort would be on recent ROE because we already know the latter adds value statistically.
The net effect would be to (a) mainly eliminate firms that just had a single unusually good year, but (b) stick with the one-year figure which we have reason to believe works well.
The first step is used as a “crap filter”.
The consensus view is that overly complicated screens are less likely to be predictive in future, but crap filters at the start are sort of an exception.
Add as many as you like, as long as they aren’t too restrictive.

Jim

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Thank you, Jim.