Monday rolls around, and someone has to complain about the state of the stock market. But I can’t help but hum “Tale as Old as Time” nostalgically as I reflect on O’Shaughnessy and his Tiny, yet very successful, Titans.
If you’re unsure who James O’Shaughnessy is and his Tiny Titans, it’s time. It’s time to take a trip through one of the most successful approaches to the market using quantitative data that is now mixed with the software analysis of Equities Lab.
Who is O’Shaughnessy, and what are Tiny Titans?
The big question is, who is this O’Shaughnessy? He is the CEO of O’Shaughnessy Ventures and the author of Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years. The book documents his quantitative investment strategies to predict what will happen in the future (stay tuned).
Why should you know who he is? Because James O’Shaughnessy devised a highly successful strategy for picking stocks called Tiny Titans.
What are Tiny Titans? Tiny Titans are the companies that fit O’Shaughnessy’s criteria for Market Cap, Price-to-Sales ratio, and momentum expectations. The name, Tiny Titans, exemplifies the micro-cap size of the companies combined with their ferocious success.
The Magic Formula Behind Tiny Titans
For brevity’s sake, this article will focus only on O’Shaughnessy’s original Tiny Titan screener (From AAII, which has since been improved), found under the Explorer Tab, by typing “Tiny Titan.” Once the screener is selected, the Editor Tab will display the formula below.
Let’s break it down, he believed that micro stocks (companies with a market cap of $25 to $250 million) that had a price-to-sales ratio of less than 1 (meaning the market cap was lower than the revenue going into the company, aka the company’s sales are undervalued), and that maintained positive growth over a year of trading days (roughly 255 days), is considered a Tiny (yet mighty) Titan. The formula has since been further enhanced, but this is still a pretty good go at the market.
After backtesting, it is clear that the screener has SIGNIFICANTLY beat the market within the past five years. Absolutely crushing it in this visual from 2021 on!
The numbers and measurements below tell the same story; just look at the Annualized Alpha and Total Returns.
The graph below makes the same point but with different visuals to emphasize how well those Tiny Titans did, look at 2020!
After just a little 5-year experiment, you can see why O’Shaunessy is respected for his strategy. Don’t forget; these are the bare bones of what has become quite complex.
Using the Piotroski F-Score
If you see the value in the strategy but are still a little nervous about the outcome of investing in micro stocks, let’s provide an extra layer of security! With Equities Lab, you can easily continue increasing the positive vibes when you screen for stocks. Let’s look at the individual Piotroski F-Scores of each result to double down on healthy companies.
How can you easily see this score? To visualize the Piotroski F-Score through the tear sheets, first, click on the “Results” tab, click on any stock, then that stock will pop up in a new window, select “Change tear sheet,” then select “Piotroski F-Score T12M.” Now, every time you click on the stock, it will pop up with the score and how it was calculated.
The first company, shown below, is Reitmans. It has a score of 8, which is pretty good on a scale of 0-9. The fact that the screener did so well, AND the company appears healthy, are some strong green flags.
The same situation as above is down below. EACO has a Piotroski F-Score of 8, showing a healthy company with good value through a solid strategy.
The third company shown below, Orbital Corp, has a Piotroski F-Score of 1. The low score indicates a poorly run company with poor fundamentals that does not have a good value. With a score like that, it doesn’t matter if it fits the criteria of a Tiny Titan because a strong red flag means you should reconsider.
O’Shaughnessy’s Tiny Titans did it again! A successful screener outperformed the market with the added security of the Piotroski F-Score. It is a foundational strategy that has continued to develop in predicting the future (good job, James) around stocks. Yet, there are still lessons to learn.
The takeaways from the strategy;
- A red flag can exist within a good strategy.
- A good strategy doesn’t mean you invest in EVERY company, stock, asset, etc.
- If you’re unsure about investing in a company, keep testing it!
- Don’t forget to use all the features in Equities Lab to enhance your results.
Keep reading about groundbreaking strategies, how to implement them, and tips on making Equities Lab work for you.