Continuing our summer theme of looking at some of the Guru Screens, I was intrigued by the Charles Kirkpatrick Bargain Shares screen. This is based on a rather interesting finding that Kirkpatrick wrote up in his book Beat the Market, which is something I'd not come across before. He found that when combined with a measure of price strength, stocks tended to outperform if their relative price-to-sales ratio fell between the 17th and 42nd percentiles in terms of cheapness.
This is how this would be implemented in the Stockopedia Screening Tool:
Kirkpatrick doesn't explain why but simply says it was the best-performing range in his backtests. This is an unusual result because a lot of the academic studies on Price-to-Sales show data similar to this, taken from James O'Shaughnessy's What Works on Wall Street, which Kirkpatrick references:
However, if I estimate the Sharpe Ratio for the same data using a 5% risk-free rate, I get a slightly different picture. (The Sharpe Ratio is a measure of the excess return per unit of volatility and recognises that investors typically prefer a less volatile...
