Who is Jim O'Shaughnessy, and what is the O'Shaughnessy All Cap Screen?
James O'Shaughnessy is the quantitative investor behind "What Works on Wall Street" and the founder of O'Shaughnessy Asset Management. The O'Shaughnessy All Cap Screen — his "All-Cap Value with a Growth Twist" strategy — comes from a later book, "Predicting the Markets of Tomorrow" (Portfolio, 2006), where he argued that equity returns move in roughly 20-year trends and that the cycle starting around 2000 would favor smaller companies and large-cap value over the large-cap growth names that led the 1980s and 1990s. This screen is the broadest of the four he built for that book: it reaches across the entire size range and stacks three value tests on top of a momentum finish.
The core idea
Rather than commit to one value ratio, the All Cap screen demands cheapness on three at once, and it expresses each as a ranking against the whole database. A stock has to sit in the cheapest 30% on price-to-sales, the cheapest 30% on price-to-cash-flow, and the highest-yielding 30% on dividend yield. Clearing all three at the same time is a stiff test — plenty of cheap stocks fail one leg — and it leaves a list of genuinely out-of-favor companies. The "growth twist" is the last step: among those value survivors, the screen keeps the 25 with the strongest price gain over the past year, letting momentum separate the companies the market has begun to re-rate from the ones still sliding.
What the O'Shaughnessy All Cap Screen looks for
- Companies based outside the United States are excluded, as are over-the-counter stocks.
- Market capitalization at or above $200 million, using 2006 as the base year and raising the floor 3% a year for inflation. There is no upper limit, so the screen spans small, mid, and large caps.
- Price-to-sales ratio in the bottom 30% of the database (a percent rank below 30).
- Price-to-cash-flow ratio in the bottom 30% of the database (a percent rank below 30).
- Dividend yield in the top 30% of the database (a percent rank above 70).
- From the companies that pass, the final portfolio is the 25 with the highest 52-week relative strength.
Why the O'Shaughnessy All Cap Screen can work
Three value gates are harder to fake than one. A single low ratio can be an accounting quirk; low price-to-sales and low price-to-cash-flow and a high yield together point to a company the market has actually marked down. The relative-strength overlay then addresses value investing's oldest problem, the falling knife. By buying only the cheap names whose prices have already turned up, the screen tries to skip the stocks that are cheap and getting cheaper. It also fits O'Shaughnessy's broader thesis: if smaller and value-oriented stocks really were entering a long favorable stretch, a screen with no upper cap and a heavy value tilt is built to ride it.
What to keep in mind
Percent-rank filters move with the market. In an expensive market the "cheapest 30%" may not be cheap in absolute terms, and the screen will still hand you 25 names. Stacking three value factors tends to concentrate the list in whatever sectors are currently disliked, so the result can be lopsided. Momentum, the one growth element here, reverses hard and without warning, which means the finishing filter can buy stocks near a short-term peak. And because there is a real lower size bound but no upper one, some passing names may be small enough to be thin to trade. AAII rebalances the screen monthly in its test and ignores transaction costs; a real portfolio would not.
Sources
Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years, James P. O'Shaughnessy, Portfolio, 2006.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition.