It has been more than a year since most parts of the United States were locked down due to the coronavirus pandemic. After several federal aid programs for the coronavirus, widespread distribution of vaccines, and the reopening of states, the economy continued to recover. The vaccine has helped many people return to a more normal life. The number of new cases continued to decline. However, this does not mean that we are completely safe.
Most people in the United States and internationally have not yet been vaccinated. New variants of the coronavirus are spreading. Economically, many people are unemployed or underemployed. We still don’t know what the new normal is.
Overall, however, investors, especially small businesses, are generally optimistic, driven by improving economic expectations. Small businesses tend to be more sensitive to economic conditions. 4,444 small-cap growth stocks increased 16.5% in the first half of the year, while small-cap value stocks increased 30.6%. The S&P SmallCap 600 Index’s total return (including dividends) in the first half of the year was 23.6%, outperforming the Mid-Cap Index in the same period. As of June 30 of this year, the Standard & Poor’s Mid-Cap 400 Index was up 17.6%, while the S&P 500 Index’s total return increased 15.3%.
For patient investors who can withstand higher short-term volatility and small-cap stock risks, strong long-term returns are possible. As of June 30, 2021, AAII’s O`Shaughnessy SmallCap’s growth and value stock selection method has grown by 164.3% so far this year. The average annual profit of the evaluation model since its establishment (1998) is 20.1%, while the return is 9.0% for S&P. The SmallCap 600 index is over the same period.
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AAII tracks the various screens of James O`Shaughnessy, the founder and president of O`Shaughnessy Asset Management LLC, an asset management company based in Stamford, Connecticut. The O’Shaughnessy screen developed by AAII is based on the strategy described in his book “The Role of Wall Street: The Best Performance Investment Strategy Ever (3rd edition, 2005, McGrawHill) and the strategy described in “Predicting Tomorrow’s Market” Anti-investment strategy in 2006 (Penguin Group, 2006).
O`Shaughnessy’s small-cap stock growth and value approach focuses on small-cap stocks that have upward momentum using growth and value criteria. The screen looks for “cheap stocks on the road to recovery.” Much research has been conducted on the success of the market capitalization category of investment. AAII’s shadow stock portfolio is based on a study that shows that small-cap stocks and micro-cap stocks tend to outperform the broader market over a long period of time.
O`Shaughnessy believes that the reason for the outstanding performance is that few analysts pay attention to these small actions. In addition, due to the relatively small number of outstanding shares, many institutional investors and mutual funds cannot trade these stocks without changing prices. This leaves room for surprises, which may lead to “popular” performance. O’Shaughnessy also said that small-cap stocks have a low correlation with the broader stock market, making them a potential hedge in a large-cap stock portfolio.
Positive earnings growth relative to the market and strong price strength
The AAII version of O`Shaughnessy’s Small Cap Stock Growth and Value screen contains few standards. First, all foreign stocks and OTC stocks have been eliminated. Second, the market value of a stock must be between $ 200 million and $ 2 billion. O’Shaughnessy adjusted these inflation limits using an average long-term interest rate of 3% per year. However, adjusting for inflation is more important than calculating portfolio returns. By back-testing and adjusting the market value forward, you will be able to maintain the database that needs to be dumped regardless of the impact of inflation on the size of the asset.
After screening the stocks with the highest market capitalization, AAII screens for stocks with a P/S ratio less than 1.5. The sales price ratio compares the current price of the stock with the company’s sales. O`Shaughnessy uses it instead of “low price” instead of price/yield ratio. He believes that all viable companies have sales, and sales are more difficult to manipulate than profits. In What Works on Wall Street, O’Shaughnessy found that stocks with low P/E ratios generate higher returns.
Earning per share growth (revenue less cost of sales, operating expenses, and taxes, over a specified period of time) is a popular way to measure a company’s growth potential. Earnings per share play a vital role in the price of stocks, primarily due to market expectations. Low income or negative income is often a sign of young companies; however, these startups are trying to increase profits quickly and can be turned into profitable investments. The O`Shaughnessy SmallCap Growth and Value screen finds stocks with earnings per share growth greater than zero in the last 12 months.
A variety of price appreciation factors also help find companies with rising profits and rising stock prices. This screen looks for stocks with above-average relative strengths in 13 and 26 weeks compared to the S&P 500 Index.
O`Shaughnessy believes investors should have 25 stocks in this small-cap portfolio to diversify the risk of holding stocks so volatile. As a result, the field declined further to 25 stocks with the highest relative strength in 52 weeks. Currently, 25 companies have passed the O`Shaughnessy SmallCap Value and Growth Assessment.
For an equity investment strategy to be useful, it must be able to be invested. This means that quantitative methods should generate enough companies in transit to conduct additional due diligence to determine investment candidates. Since the O`Shaughnessy SmallCap Growth and Value filter looks for the 25 companies with the highest price intensity last year after applying the value and market value filters, companies usually pass it. However, please note that there may be some periods

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