Who is Josef Lakonishok?
Josef Lakonishok is a finance professor who became a money manager, and the Lakonishok Screen carries his name because it distills the research that made his reputation. In 1994 he published "Contrarian Investment, Extrapolation, and Risk" in the Journal of Finance with fellow economists Andrei Shleifer and Robert Vishny — one of the most cited arguments ever made for value investing. The three later founded LSV Asset Management, the Chicago firm whose name is simply their initials. The Lakonishok Screen turns that finding into a set of rules: buy cheap stocks, but only ones that are starting to turn.
The core idea
The 1994 paper made a behavioral claim. Investors extrapolate — they take a company's recent growth and assume it continues, paying up for glamour stocks and shunning value stocks. Those expectations are usually too extreme. Glamour is priced for perfection and eventually disappoints; value is priced for failure, so an ordinary result comes as a pleasant surprise and the stock re-rates. The extra return value earned, the authors argued, was not payment for extra risk — value held up at least as well as glamour in weak markets. Buying cheap alone, though, invites the value trap: some out-of-favor stocks stay out of favor, or die. So Lakonishok pairs cheapness with evidence that sentiment is already shifting — recent price strength and rising earnings estimates. Cheap and improving, not just cheap.
What the Lakonishok Screen looks for
- Market capitalization for the most recent fiscal quarter is at least $500 million.
- Companies traded over the counter (OTC) are excluded.
- Companies trading as American depositary receipts (ADRs) are excluded — Lakonishok's version keeps to US-listed names.
- Companies in the miscellaneous financial services and real estate operations industries are excluded.
- At least one of four value tests is met: the price-earnings, price-to-book, price-to-cash-flow, or price-to-sales ratio sits below the median for the company's industry. Passing a single one qualifies.
- Relative price strength over the past 26 weeks is greater than zero — the stock has outpaced the S&P 500 over six months.
- Relative price strength over the past 13 weeks is at least as high as the 26-week figure, so the advance is holding up rather than fading.
- No analyst has cut the current fiscal year's earnings estimate in the past month.
- At least one analyst has raised the current fiscal year's earnings estimate in the past month.
- The consensus earnings estimate for the current fiscal year is higher than it was a month ago.
The evidence
The screen's backing is the paper itself. Sorting US stocks on price-to-book, price-earnings, price-to-cash-flow, and price-to-sales over a sample running from 1968 to 1990, the authors found value portfolios beat glamour portfolios by a wide margin. The more important result was the second one: value did not underperform in down markets or recessions — the periods when a genuinely riskier strategy should hurt most. That undercut the standard efficient-market defense, which held that value's premium had to be compensation for hidden risk. If it was not risk, it was mispricing — investors systematically over-extrapolating past growth — and mispricing can be exploited.
What to keep in mind
Lakonishok's own answer to the main risk is patience. Value can lag for years before the market comes around, and the wait tests most investors long before it pays. The momentum and estimate-revision overlay reduces the value-trap problem but does not remove it — price strength can reverse as fast as it appeared, and pairing value with recent momentum can whipsaw when the market rotates. Note also how loose the value test is: a stock qualifies by beating its industry median on just one of four ratios, so a name that looks cheap on sales may be expensive on earnings. The screen surfaces candidates; it will not tell you why a given stock is cheap. That question still has to be answered company by company.
Sources
Contrarian Investment, Extrapolation, and Risk, Josef Lakonishok, Andrei Shleifer, and Robert Vishny, Journal of Finance, 1994.
Lakonishok is also profiled in Investment Titans, Jonathan Burton, McGraw-Hill, 2001.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition and commentary.