Consistent Cash Creators During the Great Recession

Continuing my look back at the performance of my Consistent Cash Creators screen, today I completed examining the performance of Consistent Cash Creators with high normalized earnings yield during the Great Recession. The current financial crisis started in 2007, but really only picked up steam in 2008 and 2009. This tumultuous period of the stock market is a perfect time to put a stock screen to the test.

I actually first ran the Consistent Cash Creators with High Normalized Earnings Yield screen back on March 27, 2008. However, that version of the screen was not as strict as the current version. I only required an r-squared of 0.70 or greater for the past seven years of free cash flows. The r-squared of free cash flows basically indicates how closely the trend in free cash flows follows a straight line. The results of that earlier version of the screen are not as impressive. The average return from March 28, 2008 to March 27, 2009 was -45%, while an S&P 500 index fund returned -36%. By March 26, 2010, those stocks recovered substantially bringing the average return of the screen back up to a positive 10%. The S&P 500 index fund was still down 8% over that same two year period. It should be noted that these performance numbers exclude five stocks that stopped trading. I think a few of those stocks were bought out, but at least a couple also probably went to zero and likely brings the previous performance number down a bit more.

By the time I ran the Consistent Cash Creators with High Normalized Earnings Yield screen again in 2009, I had raised the r-squared requirement to 0.90 or greater. I’m not quite sure what motivated me to tighten the requirement, but it had a pretty strong impact on the performance of the screen. I also noticed that all but one of those stocks selected in 2008 under the stricter criteria are still currently trading today. Below is a table that contains a list of stocks selected based on March 21, 2008 numbers using the current version of the Consistent Cash Creators screen.

Company Ticker Norm EY P/E P/FCF P/B ROIC R2 Return yr 1 Return 2 yrs
Rural/Metro Corporation RURL 56.4 3.6 17.3 0.91 -56% 266%
Denny’s Corporation DENN 48.94 8.6 15 45.1 0.91 -43% 22%
Aladdin Knowledge Systems Ltd. ALDN 34.1 18.3 14.3 2.17 9.3 0.96 -39% -39%
EZCORP, Inc. EZPW 31.71 13.2 12.6 2.23 15.5 0.94 -16% 63%
National Instruments Corp NATI 22.23 19.4 25.6 3.08 14.5 0.97 -26% 31%
Tessera Technologies, Inc. TSRA 19.83 15.7 9.9 1.67 8 0.92 -17% 35%
Mettler-Toledo International I MTD 18.98 19.9 19.7 5.82 18.2 0.96 -49% 13%
Pediatrix Medical Group, Inc. PDX 18.85 24.6 19.1 3.53 13.9 0.96 -58% -14%
Autodesk, Inc. ADSK 18.49 21.6 11.6 5.98 27 0.90 -54% -10%
Amgen, Inc. AMGN 17.67 14.4 10.8 2.44 11 0.92 20% 44%
Quest Diagnostics Incorporated DGX 17.42 15.8 13.9 2.62 10.7 0.92 2% 29%
Epicor Software Corporation EPIC 17.37 16 11.6 2.48 8.4 0.98 -66% -15%
Shuffle Master, Inc. SHFL 16.8 14.9 6.8 2.3 8.2 0.93 -55% 28%
Boeing Company, The BA 16.21 14.2 8.6 6.14 21.9 0.94 -51% 1%
Hub Group, Inc. HUBG 15.03 22.2 18.7 5.09 22.9 0.90 -54% -18%
Graco Inc. GGG 14.82 15.1 23.6 8.97 42.2 0.92 -52% -9%
Citrix Systems, Inc. CTXS 14.61 28 17.7 3.21 9 0.91 -30% 50%
Emerson Electric Co. EMR 14.39 17.8 25.2 4.21 17 0.91 -42% 3%
United Technologies Corporatio UTX 14.36 16.2 22 3.1 14.9 0.94 -37% 9%
SRA International, Inc. SRX 14.21 21 14.8 2.05 8.6 0.91 -43% -16%
IDEX Corporation IEX 14.01 15.3 17.7 2.03 10.9 0.91 -26% 12%
Somanetics Corporation SMTS 13.78 20.3 14.3 1.64 5.6 0.90 3% 38%
Continucare Corporation CNU 12.94 19.5 10.8 1.4 5.7 0.91 -14% 92%
Guess?, Inc. GES 12.78 18.7 20 5.25 26 0.94 -53% 22%
Rofin-Sinar Technologies RSTI 12.51 20.9 24.1 3.07 10.8 0.95 -61% -47%
Parker-Hannifin Corporation PH 12.06 13.1 15.3 2.29 13.8 0.92 -48% 1%
Cisco Systems, Inc. CSCO 11.83 19.2 16.5 4.54 17.1 0.91 -35% 3%
Moody’s Corporation MCO 11.59 13.9 13.6 194.4 0.97 -39% -15%
Paychex, Inc. PAYX 11.36 22.9 51.5 9.82 24.3 0.93 -25% 4%
Baxter International Inc. BAX 11.32 22.2 41.8 5.33 17.6 0.94 -12% 5%
Average Return -36% 20%
SPDR S&P 500 SPY -39% -10%
vs. S&P 500 3% 29%
Top 5 Positions -36% 69%
Top 10 Positions -34% 41%
Top 15 -37% 29%

While the performance of the screen from March 24, 2008 to March 24, 2009 was not that impressive (negative 36% average return), it still beat the S&P 500 index fund by 3%. What is more impressive is that by March 24, 2010 the Consistent Cash Creators selected in 2008 had recovered fully and were now returning a positive 20%. The S&P 500 index fund was still only returning a -10% in March of 2010. Over the two year period of the Great Recession, the Consistent Cash Creators outperformed the index by 29%! That is very impressive and I believe it beats the performance of Joel Greenblatt’s Magic Formula over the same period. (Someone please correct me if I’m wrong.)

The top 5, 10, and 15 positions didn’t really outperform the overall average for the screen in the first year. However, by the second year, the top five positions clearly outperformed the average by 49% and the top 10 positions outperformed the screen average by 21%. This is the kind of outcome I’d expect from a well functioning stock screen.

I also noticed that the second year performance for the stocks in the table above were much higher than the performance of the stock selected in 2009. The return for the above stock from March 24, 2009 to March 24, 2010 was 104%. The Consistent Cash Creators One Year backtest we ran earlier in the week only had an average return of 62%. Usually, stock screen returns drop off over longer periods of time. However, it seems the Consistent Cash Creators screen does pretty well even over a longer two year holding period. As I continue to expand the backtest, I’ll have to see if this pattern continues.

My plan is to continue backtesting this stock screen. I think I have the data to continue testing the screen back to 2003. What are your thoughts on this screen’s backtest so far, including the 2009 backtest performance? What kinds of tests do you want to see? Stay tuned for more updates. This should be interesting.

Disclosure: At the time of this post was published, I owned shares of Denny’s (DENN) and Cisco (CSCO). I did not own any of the other shares mentioned in the post.

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