Subject: Quality Screen
I came across this in P123 post. It's a ranking system for determining Quality companies.

Pseudo Script:

1. Only US stocks
2. Select the top 50% of Industries in terms of Annual Operating Margin.
3. Select the top 50% of companies within those industries that have the highest Operating Margins.

Continue pruning in the same manner using the following criteria:
4. Top 50% industries with the highest 5-Yr operating margins.
5. Top 50% companies with the highest 5-Yr operating margins.
6. Top 50% Highest industry Asset Turnover.
7. Top 50% Companies with highest Asset Turnover.
8. Top 50% Industries with highest ROI.
9. Top 50% Companies with highest ROI.
10. Top 50% Industries with highest 5-Yr ROI.
11. Top 50% Companies with highest 5-Yr ROI.
12. Top 50% Industries with highest Interest Coverage over the past year. (Operating Income / Interest Expense)
13. Top 50% Companies with highest Interest Coverage over the past year.

At this point, there are usually > 700 companies remaining. So I added a final screen on:

14. Current FY EPS Estimate > 0 (earnings will be positive this year)
15. Select 8 stocks with the lowest Price-to-Sales and hold them for 1 year.

I know this is rather involved; however, it backtests superbly: 23-yr P123 backtest 108,000% return versus 428% for the S&P500 over the same period. The downside is that it has a stomach-churning -76% max DD, and a 47% annual Standard Deviation. Also, it occasionally picks small stocks (<$200 MktCap) that may not be liquid. I've experimented with ways to tame the max DD, but all have killed the overall return so far.

I'm hoping someone here has some good ideas. This could be a great screen if we could get the Max DD equal or less than the S&P500 (-55%).

Taz