A Top-Performing Screen of 2022: O’Shaughnessy Growth Market Leaders

This week, we present the strategy used by James O’Shaughnessy, influential investor and president of the investment advisory firm O’Shaughnessy Asset Management. Read on for how we identify stocks possessing the key characteristics O’Shaughnessy utilizes for this strategy and 10 current stock ideas from the AAII O’Shaughnessy Growth Market Leaders screen. Our O’Shaughnessy Growth Market Leaders screening model has shown impressive long-term performance, with an average annual gain since 1998 of 8.2%, versus 5.4% for the S&P 500 index over the same period.

The Growth Market Leaders Screening model was one of the best-performing screens in 2022, up 11.6% in 2022 compared to the S&P 500’s price loss of 19.4% over the same period. Through the end of November 2022, 12 of the 60 AAII screening strategies had positive returns, and 42 AAII screening strategies outperformed the S&P 500’s price loss of 18.9% year to date. (Note: The price loss for the index is used instead of total return since the impact of dividends is not included in the performance of the AAII screening approaches.) See the review of AAII’s stock screens performance in 2022 in the January 2023 AAII Journal for more details.

The O’Shaughnessy Philosophy

Although many investors believe that the market will return about 10% per year over the long term, O’Shaughnessy gives a few reasons as to why the figure can be misleading. This number does not take inflation into account, which can eat away at returns, and many investors fail to consider this when calculating portfolio performance.

O’Shaughnessy calculated the long-term inflation-adjusted average return to be about 7% per year and believes that the market will always revert to this mean. If the market has returned greater than 7% per year over several years, it will spend the next years regressing back toward the average, often overshooting this mark and falling below it.

Finally, O’Shaughnessy also argues that the average investor’s holding period is 20 years, as most people don’t have the means to save for retirement until their prosperous middle years — about 20 years prior to retirement. The 10% long-term non-inflation-adjusted average return has typically been calculated over a 78-year period. Since most investors are not investing for 78 years, they are susceptible to the shorter-term ups and downs of the market, which tend to be much more volatile over 15- to 20-year periods.

Growth Market Leaders Screen

O’Shaughnessy looks for viable investments by combining growth and value constraints. The Growth Market Leaders screen resembles both the cornerstone value and growth screens introduced in his book “What Works on Wall Street.”

Company Size

O’Shaughnessy starts with the market leaders universe, a group of stocks he first introduced in “What Works on Wall Street.” These stocks do not include foreign, utility and over-the-counter (OTC) stocks.

The next criterion is asset size, which is the defining characteristic of these screens. O’Shaughnessy categorizes large-cap stocks as those with market capitalizations greater than the average stock. He also looks for those with an average number of shares outstanding greater than the average stock.

Cash Flow Per Share

O’Shaughnessy’s market leaders also have higher cash flow per share than the average stock. This ratio is calculated by adding depreciation and amortization to income before extraordinary items, then dividing by the fully diluted average number of common shares outstanding. Cash flow measures the actual inflows and outflows of cash by taking out noncash items that can boost net income (a number that is then used in earnings per share calculations). This is a harder number to manipulate and can be a more truthful measure of financial strength.


The final main criterion is stocks with overall sales that are 1.5 times greater than the average stock. O’Shaughnessy places emphasis on strong sales and a low price-to-sales (P/S) ratio — the current stock price divided by the sales per share for the last four fiscal quarters (trailing 12 months). Unlike earnings, sales are less subject to management assumptions, therefore more difficult to manipulate, and are often less volatile.

The first additional criterion is a price-to-sales ratio less than the average for the market leaders. We can quantify this number by running a screen for market-leading stocks, finding the average price-to-sales ratio for this group and inputting the value into the Growth Market Leaders screen. All viable companies have sales, so the majority of companies will have a meaningful price-to-sales ratio. A low price-to-sales ratio is a way to identify “cheap” stocks. In “What Works on Wall Street,” O’Shaughnessy found that the price-to-sales ratio was a very effective screen for stocks of all market-cap sizes and that low ratios consistently produced higher returns.


Earnings per share growth (revenues minus cost of sales, operating expenses and taxes over a given period of time) is a popular way to measure a company’s growth potential. Earnings per share play a critical role in a stock’s price mainly due to market expectations. Low or negative earnings are often signs of young companies; however, these start-ups attempt to grow earnings quickly and can be profitable investments. The Growth Market Leaders screen finds stocks with earnings per share growth for the trailing 12 months that is greater than zero.

Relative Strength

Relative strength also plays a large role in a stock’s price momentum. Relative strength measures how well a stock has performed versus a benchmark over a certain time frame. A negative number indicates underperformance while a positive number denotes a stock has performed better. O’Shaughnessy picks the top 10 stocks with the greatest 12-month price appreciation for his final portfolio. He found that stocks with the highest price changes over the past year tend to produce the highest returns the following year. Although this can be a very effective filter, he warns that it is a highly volatile approach. Stocks with high price appreciation may be at or close to their peaks, meaning they may have smaller upside and larger downside potential. For this criteria, 52-week relative strength is adjusted until only 10 stocks pass.

Screen Criteria for Growth Market Leaders

To summarize the screening criteria for the Growth Market Leaders approach, here is a description of the 10 filters used in AAII’s Stock Investor Pro database that are used when compiling the list of passing companies:

Begin with the market leaders universe by applying the following five filters:

· Companies not based in the U.S. are excluded

· Companies in the utility sector are excluded

· Companies that trade on the OTC market are excluded

· Market cap for the latest fiscal quarter is greater than the database average for the same period

· The average number of shares outstanding for the latest fiscal quarter is greater than the database average for the same period

Continue by adding the following five filters:

· Cash flow per share for the last 12 months is greater than the database average for the same period

· Sales for the last 12 months are 1.5 times greater than the database average for the same period

· The price-to-sales ratio is less than the average for the market leaders [This value is quantified by screening for the market leaders (see above) and calculating the average price-to-sales ratio for this group]

· Earnings per share growth for the last 12 months is positive

· The final results are the 10 companies with the highest relative price strength over the last 52 weeks

10 Stocks Passing the O’Shaughnessy Growth Market Leaders Screen (Ranked by 52-Week Relative Strength)

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.

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