How do we find paradox stocks, which are low-risk stocks that could deliver the high returns promised in the book “High Returns From Low Risk: A Remarkable Stock Market Paradox”?
As Pim Van Vliet and Jan de Koning explained, these stocks should be large caps and low risk (based on betas of less than 1.0), as well as generating income (from dividends or buybacks) and enjoying positive momentum (based on the price trend).
The answer they provided in chapter 11 was to use a stock screener. A screener is basically a spreadsheet that allows you to specify certain criteria, and then perform a search for stocks meeting all those criteria. Many online financial services provide them, but the one Van Vliet and de Koning used for the book in 2016, Google’s, no longer exists.
GuruFocus offers an excellent screener, the All-in-One, and I’ll use it to demonstrate how a search can be done on it or any other comprehensive screener. We begin with the "Fundamentals" tab, where we will set filters for country, share buybacks and company size.
Country, share buybacks and company size
Within the screener, I first selected the "Fundamentals" tab and began by setting the country filter to the United States. Other countries are available based on membership levels, and other screeners may list other countries as well.
Second, we select share buybacks for various periods. Here, I’ve set the three-year line to 0% in the first column, which should rule out negative buybacks (a company is issuing more shares than it is buying back) and allow for buybacks of any size above that. Also note that while Van Vliet and de Koning were unable to filter for buybacks, I am able to using the All-in-One screener.
Third, I selected “Is in S&P 500,” rather than setting a market cap by dollar value in the second column. Since the smallest cap in the S&P 500 is at least $5 billion, it is a suitable proxy for large caps. Of course, even a cap of $1 billion would be acceptable for investors looking for a larger universe of stocks. The lower the market cap, the larger the universe, but remember that one of the criteria is income, whether through dividends or share buybacks. Since larger caps are more likely to pay or buy back existing shares, our selection should be biased to them.
This how my selections (shown in green) look on the All-In-One screener:
The All-In-One screener offers more than 500 filters altogether. And, if you are a member of GuruFocus, you need not create this screen yourself; I have saved this one as “Paradox Screener” and made it publicly available.
Scrolling down the page at this point, I see there are 294 stocks remaining out of the original 500, filtered out according to our first three criteria.
Beta and price index
Next, we select the "Price" tab and find the two criteria we need in the first column. One is beta, which provides a measure of risk or volatility; I set it to 0.1 to 0.9. The lower number ensures there are no companies with negative beta (indicating an inverse relationship with the broad market; for example, gold stocks often go up when the stock market goes down). The higher number, 0.9, ensures that the filter will select companies with less volatility than the broader market.
Just below beta, we have a filter for the six-month price index, which we will use as a proxy for momentum. This index is calculated by dividing the current price per share by the share price six months ago; thus, a stock with a price index of 1.1 or more is experiencing positive momentum, and 2.0 would indicate the price has doubled in the past six months. Van Vliet and de Koning used a 12-month period, but that is not available to us here.
Here’s what we have on the Price tab:
Now, there are 35 stocks remaining out of the original 500.
Dividends or income
Finally, we move to the "Dividends" tab. When it comes to income, the authors accepted either dividends or share buybacks (covered under the price tab). To capture companies paying dividends; I set the filter to 0.1%, which should capture every company remaining that pays a dividend. Now, income can come from either dividends or buybacks, but we do not have that option here, so I have chosen to include both, setting them at minimal levels.
The authors noted in chapter 11 that they set the dividend minimum to 3% because this would ensure the stocks are cheaply priced or that they distribute a high proportion of their profits to shareholders.
Here’s what the Dividends tab looks like after I made my selection:
32 paradox stocks
Quite frankly, I wasn’t sure what the screener would find in doing this exercise. However, out of 500 stocks in the original universe, it found 32 that matched the four essential criteria of the investment paradox:
- Low-risk.
- Large cap.
- Income (dividends or buybacks).
- Momentum (price index).
Here is the list, in alphabetical order (by symbols). Here’s what we see: column three displays the current price at midday on Jan. 30, column four shows stock buybacks over the previous three years, beta represents risk, column six displays the six-month price index and column seven shows the dividend yield as a percentage:
Conclusion
Yes, it is possible to find stocks that meet all the criteria stipulated by Van Vliet and de Koning in their book, “High Returns From Low Risk: A Remarkable Stock Market Paradox.” I used the All-In-One screener, which is available to GuruFocus members.
Having identified these 32 stocks doesn’t make any or all of them automatic investments. Investors must do their own due diligence and ensure they align with their investment goals. Value investors should study the market prices closely.
Van Vliet and de Koning also recommended that investors rebalance their shares regularly, and this, in turn, pointed to an old caveat: The results shown in this screen reflect positions at a particular time and date (Jan. 30, 2020) and will change in the coming minutes, days and years.
Read more here:
- High Returns From Low Risk: How to Identify the Right Stocks
- High Returns From Low Risk: Making the Case for a 3-Part Strategy
- High Returns From Low Risk: Income and Momentum
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