Investors are always on the lookout for strategies that yield outsize returns, yet the reality is that only a select few manage portfolios that consistently outperform their benchmarks. Legendary investor Warren Buffett once said, "The stock market is designed to transfer money from the active to the patient." Despite the temptation to trade often, its the  long-term perspective that delivers returns, and this calls for a disciplined approach in navigating stocks.

One way to maximise returns is by using screeners that automatically search for stocks that outperform on not one or two but multiple metrics. The DVM score for example, looks at several metrics across management quality, financial health, stock valuation, as well as several dozen technicals, to identify high-scoring stocks. These scores help investors shortlist quality stocks for investing.

In this edition of Chart of the Week, we analyse one particular DVM screener: the ‘DVM - High Performing, Highly Durable Companies’ screener. This screener selects stocks from the Nifty 500 index that have strong financial durability, reasonable valuation, and positive momentum scores. It is optimised to highlight the top five stocks with the highest durability scores. 

The screener backtest, which ran from March 2013 to June 2024, evaluated this strategy’s quarterly performance against the Nifty 500 benchmark. The screener delivered cumulative returns of 3,676.3% over 11 years and 4 months, with a CAGR of 37.7%. In contrast, the benchmark’s CAGR stands at 16.1%. The portfolio review frequency chosen for this backtest is quarterly.

The heatmap presents a period analysis, showcasing the strategy's quarterly returns from Q1FY14 to Q1FY25. The data reveals that this approach delivered positive returns in 31 out of 45 quarters. It also outperformed the Nifty 500 index in 29 of these 45 quarters. 

The strategy experienced a maximum drawdown of 28.4% in Q1FY23. 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 did 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 screener currently has stocks such as Bombay Burmah Trading Corporation, Adani Ports & Special Economic Zone, Jindal Saw, Ambuja Cements, and Apollo Tyres.

In the course of the backtest, Ceat gave the highest returns of 428.8%. On the other hand, Triveni Engineering & Industries’ stock price had the highest fall of 48.8%.  

Apar Industries and EIH performs the best in the DVM screener over the past two years

Here, we look at stocks with the highest returns over the past two years from the DVM screener’s backtest. Electrical equipments 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%.

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, Kalyan Jewellers India, active in the screener from June 30, 2023, to September 29, 2023, delivered a return of 46.7%. The rise came after the company’s net profit surged by 33.3% in Q1FY24 to Rs 143.9 crore, aided by expansions in northern regions of India and the UAE.

Adani Ports leads in one-year gain among active stocks

Let’s now focus on 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 46.2% in the past quarter and 104.3% in the past year. The company’s net profit increased by 189.6% YoY in Q3FY24, followed by a surge of 116.1% in Q4FY24.

Marine port & services company, Adani Ports & SEZ witnessed its share price surge by 14% in the past quarter and 106.5% in the past year. The company delivered a volume CAGR of 15% over FY19-24 outperforming volume CAGR of 4% for all ports in India.

Meanwhile, industrial products manufacturer Jindal Saw’s share price soared by 13.7% in the past quarter with gains of 78.4% in the past year. Ambuja Cement, on the other hand, witnessed a 12.9% uptick in its stock price in the past quarter and 64.5% in the past year.

Lastly, Apollo Tyres saw its share price surge by 16.3% in the past quarter, with over 32.4% gains in the past year. In FY24, this tyre manufacturer brought down its debt significantly by Rs 1,646 crore to Rs 3,942 crore due to 61.2% higher cash from operations on a YoY basis.

In summary, the screening criteria results in stocks that can potentially deliver medium to long-term gains with moderate risk, as suggested by the max drawdown of 29.9%. Despite uncertainties like the Covid pandemic and highly volatile election periods, this screener gave a mean quarterly return of 9.7%. It also consistently held an average stock count of 4.7, implying diversified investment, except for Q1FY21 when it had no stocks.