Who is Jim O'Shaughnessy, and what is the O'Shaughnessy Growth Screen II?
James O'Shaughnessy is the quantitative investor whose 1996 book "What Works on Wall Street" (McGraw-Hill, revised 1997) back-tested growth and value factors across decades of market data. The O'Shaughnessy Growth Screen II is the revised-edition version of his growth strategy — the recipe he named Cornerstone Growth — and the story of how it changed is the most interesting thing about it. The original screen demanded five straight years of rising earnings — a bar so high that fewer than one stock in ten cleared it. The revised recipe threw that out, asked only that the latest year's earnings be positive and growing, and shifted the real selection work onto price momentum. This screen implements that revised approach.
The core idea
O'Shaughnessy's testing produced an uncomfortable result for growth investors: buying the fastest earnings growers, the highest-margin companies, or the highest return-on-equity names generally lost to the market, because investors overpaid for the excitement. Two signals bucked that pattern — a low price-to-sales ratio and strong relative strength. Growth Screen II is built from exactly those. It sets a price-to-sales ceiling of 1.5, looser than the 0.75 to 1.0 a pure value screen would use, so growth-oriented companies can still qualify while the genuinely overpriced ones are filtered out. It asks only for positive recent earnings growth rather than spectacular growth. Then it ranks every survivor by one-year price change and keeps the 50 strongest. Momentum, not earnings, does the heavy lifting.
What the O'Shaughnessy Growth Screen II looks for
- Market capitalization in the latest fiscal quarter greater than $150 million — O'Shaughnessy's "all stocks" floor, meant to exclude names too small to trade cleanly.
- Over-the-counter stocks are excluded.
- Price-to-sales ratio less than 1.5.
- Positive growth in earnings per share over the last four fiscal quarters versus the prior four.
- From the companies that pass, the 50 with the largest price gain over the past 52 weeks make the final portfolio.
Why the O'Shaughnessy Growth Screen II can work
The design leans on the single factor O'Shaughnessy rated most highly for stocks of every size: relative strength. He found that the stocks with the biggest one-year gains tended to post the biggest gains the next year, and he read that persistence as the market voting with real money on companies it believed in. The price-to-sales ceiling is the counterweight. Because a low ratio consistently produced better returns in his data while high ratios were, in his word, "toxic," capping it at 1.5 keeps the screen from chasing momentum into wildly overvalued stocks. Requiring positive earnings growth is a light quality check — enough to keep out shrinking businesses without narrowing the field the way the original five-year rule did.
What to keep in mind
This is a momentum strategy wearing a growth label, and momentum is volatile. O'Shaughnessy himself warned that relative-strength approaches can test an investor's discipline severely, with sharp drawdowns when market leadership rotates. The 1.5 price-to-sales ceiling is a loose guardrail, not a deep-value margin of safety, so some passing names will be expensive on other measures. The earnings test only asks for a positive change, which lets in companies with thin or lumpy profits. And a 50-stock list re-ranked on price strength turns over often, which matters once real trading costs and taxes enter the picture. The screen finds strength; it cannot tell you when that strength is about to break.
Sources
What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time, James P. O'Shaughnessy, McGraw-Hill, 1996 (revised edition 1997).
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition.