Stock Market Winners Kassie Beachum Sage Sterrett Crystal

Stock Market Winners Kassie Beachum, Sage Sterrett, Crystal Taren, Mic Dabulskis, & Beau Lewis Advanced Investing Topics Spring 2017

Stock Market Winners -Study Background- • 222 companies were chosen from The Greatest Stock Market Winners: 1970 -1983, " published by William O'Neil & Co. • September 1989 AAII Journal titled • “Investment Characteristics of Stock Market Winners, ” o Variables examined: smart money, valuation metrics, technical indicators, earnings and profitability measures, and other miscellaneous measures. • Of these 222 companies returns (based on price appreciation) • >½ increased in value by 237 % • including outliers average increase in value: 349% Marc Reinganum - Screen Criteria – Historical Returns- Portfolio – Risk and Challenges -

Stock Market Winner Screen Criteria - Growth & Value with Price Momentum - Current Criteria Strategy Focus AAII interpretation Price-to-Book Ratio ≤ 1. 5 Value Pre tax margin (+) Value Accelerating quarterly earnings Growth & Momentum RSI minimum of 70% Momentum Stock is being sold at 15% of its max price Miscellaneous < 20 M Shares outstanding Miscellaneous

Price-to-Book Ratio - Value strategy - Original Study Current Criteria Focus on neglected firms Price-to-Book ≤ 1 Study Average. 95 Price-to-Book ≤ 1. 5 larger group of companies Analysis This metric must be used in conjunction with current market conditions (bull/bear). The adjustment made is reasonable

Minimum Fundamentals - Value strategy - Original Study Current Criteria ● Five-year annual growth rate in EPS based on the firm's fiscal data ● Positive pretax profit margin ● Five-year growth in EPS from continuing operations ● Positive pretax profit margin using operating profit margin Analysis These fundamentals do not offer much restriction, however together they help the screen weed out weak firms with a slow turnaround rate.

Requirements for Momentum -Earnings Acceleration- ● Same-quarter growth in earnings per share from continuing operations from Q 5 to Q 1 is greater than the same-quarter growth in earnings per share from continuing operations from Q 6 to Q 2 ● Earnings per share from continuing operations for each of the last two fiscal quarters (Q 1 and Q 2) are greater than the earnings per share from continuing operations for the same quarter one year prior (Q 5 and Q 6) Quarter 1 Original Study Current Criteria Focus on quarterly earnings growth Account for seasonality Quarter 2 Quarter 3 Quarter 4 2017 | Quarter 5 2016 Quarter 7 Quarter 8

Technical Analysis & Price Appreciation - Price Momentum - Original Study Current Criteria ● Required the use of Datagraph books ● weighted 40% in most recent quarter and 20% weighted in previous 3 quarters ● Weighted relative strength for last 4 quarters higher than 70% Analysis Weighted relative strength for the last 4 quarters of 70% is a positive indicator that the stock price is more likely to continue to increase than not.

Miscellaneous Limited Float: Limited float refers to the number of shares outstanding ● 20 Million Shares outstanding requirement Ratio of price on buy date: Measures how favorable the firms are with investors ● Must be selling within 15% of previous two year highs

Historical Returns Stock Market Winners S&P 500 YTD -0. 4% 1. 8% 5 Year 20. 9% 11. 7% 10 Year 15. 8% 4. 7%

Implementation • Average number of passing companies: 12 o Analyzing and purchasing for multiple clients should not be a big burden • Passing companies are Illiquid o Entering positions will take time (1 -11 trading days) o Exiting positions may be difficult and take time

Five Passing Companies Company Price (3/6) Mkt Cap B/A (%) B/A Spread Vol (Avg) P/Bk P/E Beta Shares Out Screen Req(Avg) $27. 69 484. 3 NA NA NA 0. 95 13. 6 1. 14 <20 M Two Rives Bancorp (TRCB) $17. 43 152. 2 0. 29% $0. 05 16, 435 1. 24 14. 77 0. 59 8. 78 M First South Bancorp (FSBK) $11. 79 112. 14 2. 97% $0. 35 7, 566 1. 3 16. 37 0. 38 9. 49 M Capital City Bank Group (CCBG) $20. 31 344. 21 1. 08% $0. 22 25, 353 0. 96 29. 68 0. 88 16. 81 M Eagle Bancorp Montana (EBMT) $19. 57 71. 8 2. 04% $0. 40 16, 251 1. 35 15. 98 0. 88 3. 68 M Peoples Bancorp (PEBO) $32. 35 588. 59 0. 37% $0. 12 49, 621 1. 36 18. 9 0. 68 18. 2 M

Order Execution *200 K/ Company Avg Vol ($) 20% of Avg Vol ($) Days to execute Two Rives Bancorp (TRCB) 286, 462 57, 292 3. 49 First South Bancorp (FSBK) 89, 203 17, 841 11. 21 Capital City Bank Group (CCBG) 514, 919 102, 984 1. 94 Eagle Bancorp Montana (EBMT) 318, 032 63, 606 3. 14 Peoples Bancorp (PEBO) 1, 605, 239 321, 048 0. 62

Risks to Investment • Historic risk to market: 1. 44 x • 52 week relative strength: 27. 3 o This presents some risk as these companies are considered underperformers o That’s what this screen looks for • Turnover: 57. 9% of monthly holdings o High turnover compared to all AAII screens o Average turnover for growth and value w/ momentum screens is 56% o Could be beneficial as those companies are no longer neglected

Risk to Investment • Majority of passing companies are financial institutions o Lack of diversification o Skews the P/B- Higher level of risk (leverage) • Fama and French (1992) • P/B fluctuates in bull/bear markets • Bear= many firms trade <1 • Bull= many firms trade >1

Conclusion Is it difficult to implement for clients? Will this screen continue to outperform?

Sources Reinganum, Marc. "Investment Characteristics of Stock Market Winners. " AAII Journal (1989): n. pag. American Association of Individual Investors. Sept. 1989. Web. Rotblut, Charles, CFA. "Using Book Value to Judge a Stock’s Worth. " American Association of Individual Investors (n. d. ): n. pag. AAII. June 2015. Web. Thorp, Wayne A. , CFA. "Screening for Tomorrow’s Stock Market Winners. " Screening for Tomorrow’s Stock Market Winners Oct (2011): n. pag. Web.