By Aditi PriyaHumans tend to focus on short-term rewards, and this shows up in the stock market as well, where investors often hunt for quick gains, the easy buck. But lasting success in the market comes from patience. Investor Peter Lynch said, "The real key to making money in stocks is not to get scared out of them." Instead of chasing short-term wins, and getting spooked by down cycles, staying committed for the long haul with a steady strategy is what typically leads to better returns.
One way to maximize returns is by using screeners that search for stocks that outperform on not one or two but multiple metrics. The DVM score, for example, looks at metrics across management quality, financial health, valuation, as well as several dozen technicals, to identify high-scoring stocks. These scores help shortlist quality stocks for investing.
In this edition of Chart of the Week, we analyze one particular DVM screener: the ‘DVM - High Performing, Highly Durable Companies’ screener. This screener selects stocks from the ‘all stocks’ universe and Nifty 500 universe, that have strong financial durability, reasonable valuation, and positive momentum scores. It is optimized to highlight the top five stocks with the highest durability scores.
High DVM stocks from the all-stocks universe outperformed those from the Nifty 500 universe
We ran screener backtests for both the Nifty 500 universe and the all-stocks universe from March 2013 to September 2024. These backtests evaluated the strategies’ quarterly performance against the Nifty 500 benchmark. The screeners delivered cumulative returns of 5,118.5% and 6,197.2% over 11 years and 7 months, with a CAGR of 40.7% and 42.7%, for the Nifty 500 and all stocks universe, respectively. In contrast, the benchmark’s CAGR stands at 16.3%. The portfolio review frequency chosen for this backtest is quarterly.
The heatmaps present a period analysis, showcasing the strategies’ quarterly returns from Q1FY14 to Q2FY25. The data reveals that this approach delivered positive returns in 32 out of 46 quarters for the Nifty 500 universe. It also outperformed the Nifty 500 index in 30 of these 46 quarters. For the all stocks universe, the data reveals that this approach delivered positive returns in 29 out of 46 quarters whereas it outperformed the Nifty 500 index in 30 of these 46 quarters.
The strategy experienced a maximum drawdown of 27.6% in Q2FY23 in the case of Nifty 500 universe. For the ‘all stocks’ selection, the strategy experienced a maximum drawdown of 27.1% in Q2FY22. The term "maximum drawdown" represents the largest observed loss from a portfolio’s peak to its lowest point before a new peak is attained. This strategy is automated and does not have a set stop loss, so the drawdowns show the maximum loss potential under this approach. Introducing a stop loss can reduce periods of negative returns and lower maximum drawdowns.
The DVM screener for the all stocks universe currently includes stocks like Jindal Saw, ITD Cementation, Kriti Industries, Arrow Greentech and Visco Trade Associates. Meanwhile the screener for Nifty 500 universe currently has stocks such as Bombay Burmah Trading Corp, Elecon Engineering, Alembic Pharmaceuticals and MRF.
In the course of the backtest, for the Nifty 500 universe, Ceat gave the highest returns of 428.8%. On the other hand, Triveni Engineering & Industries’ stock price had the highest fall of 48.8%. In the all stocks universe, Aegis Logistics gave the highest returns of 199.2%, while Butterfly Gandhimathi Appliances’ stock price had the highest fall of 51.8%.
Let’s look at stocks with the highest returns over the past two years from the DVM screener’s backtest. Electrical equipment maker Apar Industries was part of the screener from March 31, 2023, to June 28, 2024. During this period, it delivered a return of 238.3%.
Apar Industries tops momentum screener performance over two years
Similarly, EIH, a hotel company belonging to the Oberoi Group, was active in the screener a quarter ago from December 29, 2023, to March 28, 2024. In these three months, the company gave a return of 80.2%. The jump came as the hotel stock saw its financials improve as domestic tourism boomed. In FY24, EIH witnessed a 103% YoY rise in its net profit to Rs 639 crore, aided by growth in the luxury hotel segment, which boosted average room rates.
Great Eastern Shipping Company, which provides shipping and offshore business services to primarily oil & gas companies, was active in the screener for a year. The stock delivered returns of 65% during the period starting June 30, 2023, to June 28, 2024.
The tobacco major, Godfrey Phillips remained in the screener for two quarters, from September 30, 2022, to March 31, 2023. During this period, the company gave 58.5% returns. The company's decision in October 2022 to sell its chewing tobacco business and other trademarks allowed it to concentrate on the cigarette business. Consequently, its net profit surged by 57.6% YoY in FY23 to Rs 690.5 crore.
Lastly, JK Tyre & Industries, an Indian tyre manufacturer that makes radial tyres for an entire range of vehicles including trucks, buses, and passenger cars among others, was active in the screener from September 30, 2023, to March 28, 2024. During this period, the stock delivered a return of 55.4%.
Bombay Burmah leads in one-year gain among active stocks
Moving to the quarterly and yearly price change percentages of stocks currently active in the screener. Packaged foods company Bombay Burmah Trading Corporation’s stock price rose by 31.8% in the past quarter and 123.2% in the past year. The company’s net profit increased by 147.3% YoY in Q1FY25.
Industrial products manufacturerJindal Saw witnessed its share price surge by 31.1% in the past quarter with gains of 99% in the past year. The company revenue increased by 15.3% YoY while net profit saw a surge of 61.2% YoY in Q1FY25.
Meanwhile, Elecon Engineering, which designs, develops and supervises the manufacture of electrical equipment, witnessed a 70.3% YoY increase in the share price. Alembic Pharmaceuticals, on the other hand, saw a 30.8% uptick in its stock price in the past quarter and 57.2% in the past year.
Lastly, MRF saw its share price surge by 3.5% in the past quarter, with over 23.2% gains in the past year. This tyre manufacturer saw a 48.2% QoQ increase in their net profit in Q1FY25.
In summary, the screening criteria identify stocks that offer potential for medium to long-term gains with moderate risk. Despite uncertainties like the COVID-19 pandemic and volatile election periods, the Nifty 500 screener delivered a mean quarterly return of 10.4%. It consistently maintained an average of 4.7 stocks, indicating diversified investment, except for Q1FY21 when no stocks were held. Comparing both universes, the Nifty 500 stocks achieved positive returns in 32 out of 46 quarters, while stocks in the all-stocks universe posted positive returns in 29 out of 46 quarters.