Thrill-seekers are taking their last roller-coaster rides before the new school year begins.
Similar souls in the stock market who follow the Screaming Value portfolio might want to continue the ride because the portfolio gained 55.8 per cent over the 12 months to the end of July, 2025. At the same time, the Canadian stock market (as represented by the S&P/TSX Composite Index) managed a still generous advance of 21.4 per cent.
Over the longer term, the portfolio grew by an average of 15.8 per cent annually over the 25 years to the end of July, 2025, while the market index climbed by an annual average of 6.7 per cent. (The returns herein are based on back-tests using data from Bloomberg taken at the end of each month. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly.)
The Screaming Value portfolio picks stocks by starting with the largest 300 on the Toronto Stock Exchange by market capitalization. It then buys an equal-dollar amount of the 10 stocks with the lowest EV/EBIT ratios each month.
(Enterprise value, or EV, is the market value of a company’s equity plus its net debt. EBIT is an abbreviation for a company’s earnings before interest and taxes. Investors might think of EV/EBIT as a fancier version of the more familiar price-to-earnings ratio with EV standing in for price and EBIT for earnings.)
You can examine the return history of the portfolio, and market index, in the accompanying graph.
The method behind the Screaming Value portfolio generally works better when it comes to smaller stocks. It’s an observation that leads to the worry that its back-tested performance might be too influenced by low-priced stocks or those that trade infrequently.
The concern can be ameliorated through the creation of closely-rated variant portfolios. Three such variants start as usual with the largest 300 stocks on the TSX but they then remove stocks with low share prices from consideration before picking the 10 with the lowest EV/EBITs.
The variant portfolios that stick to companies with share prices in excess of $1, $2, and $3 gained an annual average of 15.8, 15.0, and 13.8 per cent, respectively, over the 25 years through to the end of July, 2025. The poor relative performance of the portfolio that picked from stocks with share prices in excess of $3 is a little concerning.
Looking more carefully at the variants, those with share price limits of $1, $2, and $3 eliminated an average of 1.4, 6.6, and 14.2 stocks, respectively, each month over the 25-year period. Mind you, eliminations swelled to four, 20, and 35 stocks in the financial crisis of 2008-09, which saw some very large companies trade at very low share prices.
For instance, Teck Resources Ltd (TECK.B) saw the price of its shares fall below $4 in 2009, only to subsequently jump to over $60 by the end of 2010. While it might have been psychologically difficult to buy the stock near its lows in 2009, it would have been mechanically easy to execute a buy order in a cost-efficient manner.
Trading volume offers a second way to test the original portfolio and it was used rather than share price to create three additional variants. The variants that required stocks to have minimum average daily trading volumes (over the prior three months) of 10,000, 50,000, and 100,000 shares gained an annual average of 15.1, 16.6, and 15.9 per cent, respectively, over the 25-year period.
Removing stocks with the lowest prior volumes hurt a bit but the other variants outperformed the original. As a result, it seems unlikely that liquidity issues made a big impact. It is also worth pointing out that some large companies have very high share prices and relatively modest trading volumes, but they remain reasonably easy for most individual investors to buy and sell.
While the price and volume tests suggest that the portfolio’s returns weren’t too influenced by thinly traded stocks, it’s still worth treating such stocks with care.
Thrill-seeking investors might hope for continued gains from the Screaming Value portfolio but they should be wary of the downside risk because the portfolio encountered frightening declines in the past and will likely do so again in the future.
Details on the stocks in the Screaming Value portfolio and the others I follow for the Globe can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.