James O’Shaughnessy: Knee-Jerk Investing Doesn’t Work

A quantitative investing guru who uses concrete metrics to analyze stocks, James O’Shaughnessy believes that investors get in the way of their own success by reacting emotionally, writes Validea CEO John Reese in this week’s Forbes.

The article outlines O’Shaughnessy’s investment philosophy that, to outperform the market, an investor must choose a strategy and “stick to it, no matter what” as well as his belief that most investors lack the mindset that allows them to be successful. Reese explains O’Shaughnessy’s argument that when an investor chooses an active manager, it is essential to understand the underlying stock-picking process and avoid performance-chasing.

Reese identifies the following five stocks that score well under his O’Shaughnessy-based stock screening model:

  • ManpowerGroup (MAN), a provider of workforce solutions and service, shows favorable growth in earnings-per-share as well as a price-sales ratio that is less than half the maximum allowed.
  • Watsco (WSO)is a North American distributor of air conditioning, heating and refrigeration equipment with a market cap of $5.18 billion (that well exceeds the minimum requirement) and persistent growth in earnings-per-share over the last five years.
  • T-Mobile U.S. (TMUS)is a wireless telecommunications company favored for its size ($52.17 billion market cap) as well as the stock’s price performance relative to other stocks.
  • Centene (CNC)provides a portfolio of services to government-sponsored health care programs, focusing on underinsured and uninsured individuals. The company’s price-earnings ratio and revenue growth both earn high marks.
  • American Woodmark (AMWD)manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. The company scores well based on favorable earnings-per-share growth and the stock’s solid price performance.