Who is Jim O'Shaughnessy, and what is the O'Shaughnessy Value Screen?
James O'Shaughnessy built his reputation by testing investment ideas instead of arguing about them. In "What Works on Wall Street" (McGraw-Hill, 1996, with a revised edition in 1997) he ran decades of market history through a single question: which measurable traits actually predicted higher returns? He was president of the advisory firm O'Shaughnessy Capital Management at the time and later founded O'Shaughnessy Asset Management, and his research did much to popularize the price-to-sales ratio as a value factor. The O'Shaughnessy Value Screen carries out his Cornerstone Value strategy — the large-cap, income-tilted half of that work — buying established, cash-generating market leaders and ranking them by dividend yield.
The core idea
O'Shaughnessy found that raw value ratios worked far better once you first insisted on size and financial substance. So the screen starts by carving out a group of market leaders: companies larger than the average stock, with more shares outstanding than average, cash flow per share above average, and sales running at least 1.5 times the database average. These are the kinds of firms a manager can buy in size and hold through a rough patch. Only then does the yield filter go to work, sorting the survivors by dividend yield and keeping the richest payers. In his testing, a high yield was a strong, low-drama signal among big companies — the opposite of what it did among small ones, where a fat yield often flagged trouble.
What the O'Shaughnessy Value Screen looks for
- Utility-sector stocks are excluded, so they cannot crowd out the dividend ranking.
- Over-the-counter stocks are excluded.
- Market capitalization in the latest fiscal quarter at or above the average for the entire database.
- Average shares outstanding in the latest quarter greater than the database average — a liquidity check.
- Cash flow per share over the trailing 12 months greater than the database average.
- Total sales over the trailing 12 months greater than 1.5 times the database average.
- From the companies that clear those gates, the 50 with the highest dividend yield make the final portfolio.
Why the O'Shaughnessy Value Screen can work
The logic rests on two of O'Shaughnessy's more durable findings. First, among large stocks the highest dividend yields delivered strong, consistent results without much more risk than the large-cap group as a whole — investors were paid to wait, and the payment itself signaled a business solid enough to fund it. Second, the market-leader filters strip out the fragile names that make value investing dangerous; a big company with real sales and real cash flow is far more likely to regain its footing than a cheap micro-cap with neither. O'Shaughnessy argued that value discipline rewards the people who hold it across every kind of market, which makes this screen a fit for more conservative, patient investors.
What to keep in mind
A high yield can be a warning as easily as a bargain: if the payout is about to be cut, the stock is cheap for a reason the screen cannot see. Value strategies also spend long stretches out of favor — the last growth-led decade was punishing for anyone anchored to low multiples and high yields. Because utilities are removed and yield does the final sorting, the list can lean heavily on a handful of income-rich sectors, so check the sector mix before you treat it as diversified. And the screen ranks candidates; it never explains why any one of them is cheap. Read the story behind each name.
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.