Top 10 Screening Strategies
Contents
1. urn was 55 7 with an average win ratio of 70 was 24 4 with an average win ratio of 66 was 139 2 with an average win ratio of 88 was 75 4 with an average win ratio of 75 And in 2005 the average annualized gross return was 36 3 with a 69 win ratio The below chart shows the average annualized returns Breakouts Strategy vs S amp P 500 150 0 140 0 130 0 120 0 110 0 100 0 90 0 80 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0 4 0 0 10 0 Average Annualized Returns 20 0 i 30 0 2001 2002 2003 2004 2005 m Breakouts 55 7 24 4 139 2 75 4 36 3 m S amp P 500 10 7 18 3 27 9 88 97 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks Zacks Investment Research Inc Research Wizard www zacks com RW 36 Cheap Stocks and Big Returns continued This strategy also tested well using a one week rebalancing period In fact it does fantastic Get It J sow This screen is available in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder SoW short for Screen of the Week Selecting the file bt_sow breakouts Additional Comments Note Even though this screen will generally produce on average of 4 5 stocks per period there will be times where2. 30 0 20 0 ti 10 0 0 0 t t Average Annualized Returns 10 0 20 0 30 0 2001 2002 2003 2004 2005 m Inc Cash Flows 37 8 41 9 108 3 18 4 42 9 m S amp P 500 140 7 18 3 27 9 88 9 7 Get It sw file bt_sow_increasing cash flows Zacks Investment Research Inc gt Research Wizard www zacks com RW More Winning Strategies continued EPS Growth Past and Present strong earnings growth then and now EPS Growth Past amp Present Strategy vs S amp P 500 100 0 90 0 4 80 0 4 70 0 60 0 50 0 4 40 0 4 30 0 4 20 0 10 0 4 0 0 10 0 4 20 0 4 30 0 Average Annualized Returns m EPS Gr P P m S amp P 500 2001 2002 2003 31 8 47 5 89 9 10 7 18 3 27 9 2004 29 1 8 8 2005 22 1 9 7 Get It sw file bt_sow_eps growth past and present Zacks Investment Research Inc gt Research Wizard www zacks com RW 47 More Winning Strategies continued Winning Ways winning ideas from some of our winnigest strategies Winning Ways Strategy vs S amp P 500 100 0 80 0 70 0 60 0 X 50 0 N 40 0 3 30 0 lt lt 20 0 i v 10 0 g E 0 0 l 10 0 i 20 0 i 30 0 2001 2002 2003 2004 2005 m Winning Ways 48 1 3
3. Adv Neuro Sys 0 09 0 10 0 13 0 13 0 14 0 16 0 18 0 19 0 21 0 23 POLLUTION CONTROL Stericycle Inc 0 26 0 27 0 30 0 32 0 34 0 37 0 40 0 42 0 43 0 46 COMPUTER OFFICE EQUIPMENT Global Imaging 0 36 0 39 0 41 0 42 0 43 0 48 0 50 0 51 0 56 0 57 M Systems Flash 0 05 0 04 0 03 0 02 0 01 0 00 0 06 0 11 0 14 0 15 COMPUTER SOFTWARE SERVICES Akamai Tech 0 29 0 28 0 24 0 11 0 09 0 03 0 01 0 04 0 07 0 09 Cognizant Tech 0 07 0 08 0 08 0 09 0 10 0 12 0 13 0 14 0 17 0 18 Infosys Tec Adr 0 16 0 18 0 20 0 20 0 22 0 25 0 27 0 29 0 31 0 33 Openwave Sys 0 57 0 51 0 42 0 33 0 24 0 20 0 15 0 09 0 02 0 01 Radware Ltd 0 05 0 02 0 03 0 05 0 07 0 10 0 13 0 14 0 16 0 17 ELECTRONIC SEMICONDUCTORS Analog Devices 0 15 0 16 0 17 0 19 0 22 0 25 0 30 0 39 0 43 0 43 Broadcom Corp 0 06 0 03 0 02 0 06 0 10 0 14 0 19 0 29 0 35 0 36 Marvell Tech Gp 0 06 0 07 0 08 0 10 0 11 0 13 0 15 0 17 0 20 0 21 BANKS amp THRIFTS Commerce Bep Ni 0 49 0 53 0 57 0 60 0 63 0 67 0 71 0 75 0 79 0 83 v f And if you have access to the Integrated Company Analysis ICA program you can right click on the stock and pull up a price chart with an EPS overlay See below Zacks Investment Research Inc gt Research Wizard www zacks com RW 26 Earnings Acceleration continued Eps sh DORAL FINL CORP
4. with low P E s this is one of the best ways to find focus on companies with the them oe highest growth rates with And this screen does just that the lowest P E ratios Parameters Companies with 5 Yr Historical Growth Rates to be in the top 20 percentile of all companies Using a Uniform Rank of 1 99 99 being the best growth rates screened for stocks ranked 80 or better meaning they had growth rates better than 80 of all of the other companies Companies that also happened to have the lowest P E s too lower than 80 of all other companies Using a Uniform Rank of 1 99 again this time 99 having the lowest P E s screened for stocks ranked 80 or better meaning they also had lower P E s than 80 of all of the other companies too gt Price gt 5 then required those qualified stocks to be trading at or above 5 Average 20 Day Share Volume gt 100 000 With average daily trading volumes of 100 000 shares or more Zacks Rank lt 2 And a Zacks Rank of 2 or less Only buys and strong buys allowed Results ran a series of tests over each of the last 5 years 2001 thru 2005 rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four week periods This exercise was done to eliminate coincidence and verity robustness Over the last five years this strategy has shown an average annualized g
5. 1988 this is a great way to start things off Change Q1 Estimates over the last 4 weeks gt 0 Only earnings with fresh upward revisions for the current quarter or at the very least no downward revisions qualify This is one of the most important filters and one of the reasons why this screen is called Upgrades and Revisions gt Rating Change over 4 weeks gt 0 Since analysts ratings have such a huge bias to the upside I m excluding anything that s been even slightly downgraded Plus since stocks receiving upward estimate revisions will generally see the brokers that cover them upgrade their ratings this makes sense This too is another big item and where the Upgrades name came from gt P E using 12 mo Forward EPS Estimates lt 65 It s been shown that stocks with forward P E ratios over 65 tend to underperform the market So we re keeping the lid on at 65 and under 5 Year Historical EPS Growth gt 17 Yes 17 When this screen was created the average stock in the Zacks universe had a 5 year historical growth rate of 11 Basically this strategy is looking for companies that are doing better than the average historical growth rate and at present it s seeking companies that are more than 50 above this threshold Change Actual EPS F0 F 1 gt 0 In addition to the 5 yr historical growth rate we re also looking for positive EPS growth over this last year as well FO being the last complet
6. H 20 no H i s th 0Y JU 7 T T T speed Pea La 75 aanahcatt thal ee 2001 2002 2003 2004 2005 r A 4 8000 m M au au au E ROE Strategy 43 0 17 4 78 5 27 0 22 3 ai sii E iii aa a m S amp P 500 9 7 21 5 24 1 11 4 4 9 Compounded Total Return 365 6 2 8 10 000 Starting Equity 46 559 88 10 281 83 Win Ratio 72 47 65 Avg of Stocks Held 30 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks Zacks Investment Research Inc Research Wizard www zacks com RW 22 Return on Equity ROE continued This screen can also be found in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the ProfitTracks folder Selecting the file roe Zacks Investment Research Inc Research Wizard www zacks com RW 23 Chapter Earnings Acceleration The Difference Between Good Stocks and Great Stocks In good markets or bad strong earnings are one of the most important things that influence stock prices But instead of just looking at the most recent quarter s earnings try looking for earnings acceleration too Studies have shown that almost all of the most successful stocks in the past had displayed accelerated earnings BEFORE their most impressive price moves Sideways percentage earnings growth even if they re good or decelerating p
7. M 6 50 Price E U ORAE AEE EDF ce ere aes hirer e A cies eae er eer ae es 452 Consensus Estimate SER erator R ts 28 hance EFS Surprises Eel ar PEAT ks ai o 15 12 95 6 96 12 96 6 97 12 97 6 98 12 98 6 99 12 99 6 00 12 00 6 01 12 01 6 02 12 02 6 03 12 03 6 04 12 04 6 05 12 05 6 06 12 06 6 07 lt 8 89 12107 gt gt The solid red line plots the actual EPS and the dotted red line plots the Estimated Earnings Consensus also included the stock s EPS Surprise history in this screen shot too The green and red arrows show positive or negative surprises This strategy will typically find stocks with fantastic earnings consistency and a history of beating earnings expectations Get It Es This screen is also available in the Research Wizard Go to Screen on your Menu Bar Open Screen Definition Double click the SoW folder Select the file sow_increasing earnings Zacks Investment Research Inc Research Wizard www zacks com RW Chapter Big Money I ve published this screen numerous times in our Screen of the Week articles and this is one of my favorite strategies In fact if you re looking for a strategy that holds only a few stocks in your portfolio at any time 3 this IS my favorite strategy It s a price momentum screen that finds stocks on the move In fact it looks for the top price gainers over the last 1 month 3 month and 6
8. can see it s quite easy to create a Custom Consensus or a Screen of Screens strategy You just have to make sure you ve got good strategies to draw from And while that s no guarantee of success strategies that have proven to pick good stocks in both up markets and down markets in the past should continue to do so in the present and in the future 44 Chapter More Winning Strategies As mentioned in the Introduction we purposefully narrowed this book s focus down to only ten of our best screening strategies But since there are many other strategies that have done quite well and that are popular with our users decided to list some of them along with their historical performance PEG earnings growth at reasonable prices PEG Strategy Profit Tracks vs S amp P 500 120 0 110 0 100 0 90 0 E 80 0 70 0 4 ZB 60 0 N 50 0 5 40 0 E 30 0 20 0 E Lo Zz 0 0 L 4 i L i 4 10 0 20 0 30 0 2001 2002 2003 2004 2005 m PEG Strategy 38 3 36 3 1141 36 2 24 4 m S amp P 500 10 7 18 3 27 9 8 8 9 7 Get It FJ Prot Tracks file peg Zacks Investment Research Inc gt Research Wizard www zacks com RW 45 More Winning Strategies continued Increasing Cash Flows cash is king Increasing Cash Flows Strategy vs S amp P 500 120 0 110 0 100 0 90 0 80 0 70 0 60 0 50 0 40 0
9. it by taking out the no more than four weeks old item and named it Upgrades and Revisions 2 Aside from the number of stocks and the turnover rate the performance results are very similar for both This screen can also be found by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder Selecting the file bt_sow upgrades and revisions Even More Upgrades and Revisions E Prot Tacks And lastly there s another version that can be found in our Profit Tracks folder This strategy and the other Profit Track strategies in this folder typically produce on average of 25 30 stocks per period More changes were made to this version so as to increase the number of qualified stocks coming thru But the main principle of Upgrades and Revisions still drives this screen The biggest change however was including Zacks 2 s in addition to the 1 s both Buys and Strong Buys This produced a bigger stock list for larger investors but still limited it to the best of the best See the next page for its performance statistics Zacks Investment Research Inc gt Research Wizard www zacks com RW 11 Upgrades and Revisions 2 continued The below charts and table depict the compounded returns Upgrades and Revisions Profit Tracks 10 000 starting equity Upgrades and Revisions Profit Tracks
10. literally no stocks will qualify due to the narrowness of the parameters Tip 1 But since this screen has such a great track record and such a high success rate if nothing comes through on my first pass l Il run it day after day until the screen spots something This is one of the reasons why run so many backtests using different start dates in my analysis want to make sure that the strategy has a history of picking good stocks at any time as opposed to just the 3rd Monday of every other month etc Tip 2 Even though designed this screen to be a trading strategy l Il also use this screen as a high probability stock picker for when have excess cash on the side and l m looking for cheap stocks to add to my portfolio Zacks Investment Research Inc Research Wizard www zacks com RW 37 Chapter Something for Everyone Growth AND Value This screen has something for both Growth Investors and Value Investors alike Growth Investors focus on companies with great earnings growth but that alone isn t good enough for many stock pickers any more They want good growth at reasonable prices low P E s And while Value Investors tend to focus on low P E stocks too many are low because they lack earnings power So instead try combining the best of both worlds and focus on the companies with the highest growth rates with the lowest P E ratios If you re looking for stocks the best of both worlds
11. month periods But with a Price to Sales ratio added to it these movers are still considered bargains Parameters Price Sales ratio lt 5 A low price to sales ratio is typically considered a good bargain since the investor is paying less for each unit of sales Another way of looking at this is that a Price Sales Ratio of 1 means the investor is paying 1 for each 1 in sales A P S ratio of 6 means you re paying 50 cents for each 1 in sales Average Broker Rating lt 2 Strong Buys and varying degrees of average Strong Buys Since brokers ratings are typically skewed to the bullish side want to make sure my picks have strong outlooks from the analysts covering them Average 20 Day Share Volume gt 50 000 Average daily trading volume over the last 20 days is a minimum of 50 000 shares or greater It has to be tradable gt Change in Price over 24 weeks Top 20 Looking for the top 20 price performers out of the list of stocks that qualify the above parameters gt Change in Price over 12 weeks Top 10 Looking for the top 10 price performers out of the list of the 20 best from above gt Change in Price over 4 weeks Top 3 Looking for the 3 best price gainers out of that top 10 list from above Results using a 4 week rebalancing period ran a series of tests over each of the last 5 years 2001 thru 2005 rebalanced the portfolio every four
12. p ng Strategies i hat Mi ake Money Screens that ork in both up markets and down By Kevin flatre aS Powered by Zacks Research Wizard program ia Table of Contents INTPODUCTION ek chu cides eee cis oe Ue Reena eae lee tae ea eA ea kak Meee A ii The Importance of Screening and Backtesting s ccccccccccrrrrrrcrrrr errr iii Trading the Strategies and Calculating Performance weiss cccicccsdennceteersacseest eenaa vi Chapter 1 Upgrades and Revisions 2 A Winning Strategy for Beating the Market 00eeee vd Chapter 2 Magic Numbers and Relative Valuations oss crisiresirorrrrerieeedieriiiiserer reani 1a Chapter 3 Filtering the Zacks Rank Tips on Trading the Zacks Rank 6 iisvecccessdvscedeaesesewns 16 Chapter 4 Return on Equity ROE Part of a Winning Screening Strategy ccecce 19 Chapter 5 Earnings Acceleration The Difference Between Good Stocks and Great Stocks 24 Chapter 6 Bigi MONEY iungutaneceareeuegeetweeniens AE A E wae hele mbhabennens 28 Chapter 7 Increasing P E s for Stocks on the MOVGs 4 cents pc cue rernitern rkaniecuen nano eeenuunua ae Chapter 8 Cheap Stocks and Big Returns a k a Breakouts viv scicvsavevariavdes ys neceeewsPedied 29 Chapter 9 Something for Everyone Growth and Value aiicicenescuseetanienieea ste aebue ne ne bas 38 Chapter 10 Creating a Custom Consensus of Your Winningest Screens c cee essen sees ene eee 43 Chapter 11 More Winn
13. sure to hang on to those for the next 4 weeks And you for a 4 week period would do this week after week Eventually after each 4 week period is up you d run your screen again and see if those original stocks still quality keeping the ones that did selling the ones that didn t and buying the new ones that now do So even though a 4 week holding period is being used the screen is being run weekly and only a portion of the portfolio is being rebalanced each week Get It FJ sow The Big Money screen can be found in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder Selecting the file bt_sow big money Zacks Investment Research Inc Research Wizard www zacks com RW 31 Increasing P E s for Stocks on the Move Studies have shown that many of the best stocks year after year over the past decade saw their P E ratio s increase by more than 100 from their breakout point This is also evident increasing P E s in the statistics presented in Chapter 2 s Magic Numbers and Relative Valuations A good screening tool can help you find these stocks early in their breakout cycle before they really take off Here s an example to explain this scenario Say a stock price is at 20 and its earnings over the last four Studies have shown quarters 1 per share Then its P E ratio will be 20 20 divided by 1 20 many of
14. up 30 3 with again only 10 stocks to hold on average And it was right on track again in 2005 The annualized returns for the complete list of the 1 Ranked stocks again approx 200 stocks was up nearly 18 in comparison to the S amp P s 12 But the filtered Zacks Ranked 1 s were up almost 43 That s more than twice the return on a fraction of the stocks The chart below shows these annual returns compounded over the last four years 2002 thru 2005 Filtered Zacks Rank 37 000 T 270 E Filtered Zacks Rank avg 10 stocks a mo 265 7 gt 34 000 T m Zacks Rank avg 200 stocks a mo 168 8 240 31 000 m S amp P 500 24 5 210 m i 5 28 000 180 a 25 000 150 gej 22 000 120 s 19 000 90 o 16 000 60 13 000 30 10 000 0 7 000 i i 30 2002 2003 2004 2005 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks Zacks Investment Research Inc Research Wizard www zacks com RW 17 Filtering the Zacks Rank continued If you re looking for a reliable way to trade some of the best of the Zacks 1 s try the filtered Zacks Rank trade fewer stocks for bigger returns Trading the Strategy All stocks are purchased with an equal dollar amount At the end of the holding rebalancing period 4 weeks the screen is run again keeping the stocks that remain qualified selling the stocks that n
15. vs S amp P 500 Return Upgrades and Revisions Strategy e S amp P 500 Return 80 0 62 000 520 zik 58 000 480 54 000 440 2 0 0 50 000 400 5 500 46 000 360 40 0 42 000 320 E 30 0 A 38 000 280 2 coi 34 000 240 amp eee 500 100 F 26 000 160 8 0 0 T iz j 22 000 120 lt I 40 0 18 000 80 20 0 14 000 40 a 10 000 efras desa i ifpaantenannanereteteeneetten t om 2001 2002 203 24 205 6 000 eteetesoeest ttt 40 m Upg and Rev 58 3 24 5 68 1 43 4 15 7 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 m S amp P 500 2 7 21 5 341 11 4 4 9 Compounded Total Return 449 6 2 8 10 000 Starting Equity 54 960 50 10 281 63 Win Ratio 72 47 65 Avg of Stocks Held 20290 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks This screen can be found in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the ProfitTracks folder Selecting the file upgrades and revisions No matter which Upgrades and Revisions strategies you choose they all have excellent performance results Zacks Investment Research Inc gt Research Wizard www zacks com RW Chapter Magic Numbers and Relative Valuations So many people speak to seem to believe there are some magic numbers out
16. 1 This helps solidify the current earnings picture Current Price 52 Week High gt 90 They have to be trading within 10 of the 52 Week high Change in Price over 4 Weeks gt 10 but not more than 20 I m looking for stocks on the move but not ones that have moved so much so quickly a correction could be in store Since 10 seems to get people s attention while follow thru at 20 typically signals the beginning of a trend or a breakout wanted to be alerted BEFORE a breakout was seen gt Beta lt 2 Active stocks are good but wildly volatile ones are not Zacks Investment Research Inc Research Wizard gt www zacks com RW 35 Cheap Stocks and Big Returns continued The Results ran a series of tests over each of the last 5 years 2001 thru 2005 rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four week periods This exercise was done to eliminate coincidence and verity robustness Over the last five years this strategy has shown an average annualized gross return of 66 2 with an average win ratio of 74 And it holds on average of only 3 5 stocks in your portfolio each month n 2001 the average an n 2002 the average an n 2003 the average an n 2004 the average an nualized gross ret nualized gross ret nualized gross ret nualized gross ret urn urn urn
17. 4 2 87 7 32 8 59 4 m S amp P 500 10 7 18 3 27 9 8 8 9 7 Get It sw file bt_sow_winning ways Zacks Investment Research Inc Research Wizard www zacks com RW More Winning Strategies continued Sales and Margins money made and money kept 150 0 140 0 4 130 0 4 120 0 110 0 100 0 4 90 0 4 80 0 4 70 0 4 60 0 50 0 4 40 0 5 30 0 4 20 0 10 0 0 0 10 0 20 0 30 0 Average Annualized Returns 2001 2002 Sales and Margins Strategy vs S amp P 500 2003 2004 2005 m Sales and Margins 23 6 85 6 137 0 14 0 59 5 m S amp P 500 10 7 18 3 27 9 88 97 Get It sw file bt_sow_sales and margins Zacks Investment Research Inc gt Research Wizard www zacks com RW 49 A question that get asked a lot in regard to the backtester is Will it also show the stocks that came thru in each historical period The answer is Yes Additional Comments on Backtesting It ll give you a summary of your strategy s performance and also break it down period by period See below Screen shot of Backtest report afResearch Wizard File Graphics Data Script Internet Tools Help la x Title Line 1 Title Line 2 elo ajek gllt oela aealg Historical Performance of Screen BT_SO W_ROE 2 c zir inputs sow bt_sow_toe2 und from 01 07 2005 to 12 30 2005 4 week holding per
18. 9 262 1 205 5 56 3 39 0 m S amp P 500 10 7 18 3 27 9 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks Results using a 1 week rebalancing period This screen also tests well with one week holding periods too Zacks Investment Research Inc Research Wizard www zacks com RW 29 Big Money continued In fact since it s essentially a price momentum screen running it on a weekly basis lets you keep closer tabs on the price changes of the leaders Over the last five years 2001 thru 2005 this strategy has shown an annualized gross return of 145 2 a year with an average win ratio of 61 And again whether it s rebalanced every 4 weeks or 1 week it always only picks 3 stocks per period In 2001 the annualized gross return was 76 1 with a win ratio of 61 In 2002 it was up 263 7 with a win ratio of 58 Using a 1 week rebalancing period over the last five years In 2003 it was up 154 2 also with a win ratio of and 62 2001 thru 2005 this strategy has shown an annualized gross return of 145 2 a year In 2004 it was up 127 5 also with a win ratio of and 63 And in 2005 it was up 37 4 with a 60 win ratio The below chart shows the annualized returns Big Money 1 Wk Rebal vs S amp P 500 275 0 250 0 225 0 200 0 175 0 150 0 125 0 100 0 75 0 50 0 25 0 0 0 25 0 m
19. 999 40 65 7 51 size approx 10 12 stocks it often times increases its performance r as w ll 993 44 41 10 07 1994 14 34 0 59 1995 54 99 36 31 Parameters 1996 40 93 22 36 1997 43 91 33 25 The two filters l m talking about are 1998 19 52 28 57 1 0 0 gt Change Q1 Est over 4 Weeks gt 0 i Positive current quarter estimate revisions over the last four 2000 14 31 9 10 weeks 2001 24 27 11 88 2002 1 22 22 10 gt Broker Rating Change over 1 Week gt 0 9003 74 74 28 69 Positive avg broker rating changes over the last week 2004 28 79 10 87 And of course 2005 17 97 12 01 Zacks Rank 1 These two items added to the Zacks 1 Rank produce powerful results Results ran a series of separate tests on the Filtered Zacks Rank strategy over each of the last four years 2002 thru 2005 rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four week periods This is done to eliminate coincidence and verify robustness Disclosure Zacks Rank performance is the total return price changes dividends of equal weighted portfolios consisting of those stocks with the indicated Zacks Rank assuming zero transaction costs Results reflect the reinvestment of dividends and other earnings These returns are not the result of a backtest Simulated results do not represent actual trading and may not ref
20. Big Money m S amp P 500 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks Annualizd Returns Zacks Investment Research Inc Research Wizard www zacks com RW 30 Big Money continued An interesting observation to note is that the 4 week outperformed the 1 week in 2001 and the 1 week beat the 4 week in 2004 But both approaches did equally as spectacular in 2002 And they both performed pretty spectaculary in 2003 as well But no matter how it was traded or when all of the returns were quite impressive to stay the least Alternative Trading Methods Even though originally designed this screen to be rebalanced every 4 weeks it also tests well on a 1 week basis too as you can see have also found that using a combination of both 3 F 4 week and 1 week holding periods can also be very using a combination of both effective as well 4 week and 1 week This is done by running the screen on a weekly basis holding periods can also but holding the stocks for a 4 week period In other be very effective too Running words you d run the screen at the beginning of the week buy all 3 stocks and hang on to them for the next the screen every week 4 weeks Then next week you d run the screen again but holding onto the stocks picking up any new stocks that made it thru and being
21. age win ratio of 63 nualized gross return was 89 8 with an average win ratio of 79 nualized gross return was 125 7 with an 88 win ratio nualized gross return was 44 3 with a win ratio of 73 And in 2005 the average annualized gross returns were 86 2 with a win ratio of 73 The below chart shows the average annualized returns 140 0 130 0 120 0 110 0 100 0 90 0 80 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0 0 0 10 0 20 0 30 0 Average Annualized Returns ROE Strategy vs S amp P 500 bil 2001 2003 2004 2005 m ROE Strategy m S amp P 500 59 7 89 8 125 7 44 3 86 2 10 7 18 3 27 9 8 8 9 7 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks For further illustration ran a continuous backtest starting on 1 5 01 and going thru 12 30 05 rebalancing the portfolio every four weeks also compounded the periods returns to greater simulate how one would invest For example if the starting equity was 10 000 and the first period s gain was 10 1 000 the next Zacks Investment Research Inc gt Research Wizard www zacks com RW Return on Equity ROE continued period would invest with 11 000 If that next period is off 10 1 100 the period after that would invest 9 900 Also in this illustration and all of the other performance illustrations no consider
22. an 02 Jan 03 Jan 04 Jan 05 Jan 06 Compounded Total Return 326 1 2 8 10 000 Starting Equity 42 611 65 10 281 83 Win Ratio 65 42 65 Avg of Stocks Held 15 16 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks This is an excellent Growth and Value screening strategy to find new stocks with a high probability of success Check it out for yourself Get It faa SoW This screen can be found in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder SoW short for Screen of the Week Selecting the file sow_growth and value Zacks Investment Research Inc gt Research Wizard www zacks com RW Something for Everyone Growth AND Value continued More on Ranking The above screen uses just one of the more sophisticated Ranking methods found in the Research Wizard Uniform along with Histogram and Ordinal the definitions of which and how they can be used are found in the User Manual But there s also a quick and easy visual Ranking method too that can be instantly applied to any screen report or portfolio with a click of the mouse And it s called Hot Maps Check and see where your stocks rank out of all of the other stocks out there as well as in your own portfolio and screens See which stocks are the best and which stoc
23. ates revisions amongst other things and will get us into companies whose forecasted earnings are getting stronger Broker Rating Strong Buy 100 Since broker ratings are typically skewed wildly to buy and strong buy decided to cancel out any company where the brokers aren t fully on board Price Sales lt 1 A low price to sales ratio 1 and below for example is usually thought to be of better value since the investor is paying less for each unit of sales gt Price gt 5 And for good measure all of the stocks have to be trading at a minimum of 5 or higher Most money managers won t touch anything under 5 Zacks Investment Research Inc gt Research Wizard www zacks com RW 19 Return on Equity ROE continued n 2001 the average an n 2002 the average an n 2003 the average an n 2004 the average an The Results ran a series of tests over each of the last 5 years 2001 thru 2005 rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four week periods This exercise was done to eliminate coincidence and verify robustness Over the last five years this strategy has shown an average annualized gross return of 81 1 a year with an average win ratio of 75 And it produces on average of 4 5 stocks for your portfolio each month nualized gross return was 59 7 with an aver
24. ation has been given to commission costs slippage or any other real world constraints The total return from its start date on 1 5 2001 thru 12 30 2005 is 1 698 7 with a win ratio of 80 52 winning periods out of 65 total periods A hypothetical 10 000 invested sans commissions and etc increased to 179 870 45 By comparison a hypothetical 10 000 invested in the S amp P during that time would have only increased to 10 281 83 The below chart shows the compounded returns from 1 5 2001 thru 12 30 2005 ROE Strategy 10 000 starting equity Return e ROE Strategy e S amp P 500 Return 200 000 1900 185 000 1750 170 000 1600 155 000 1450 140 000 1300 125 000 1150 110 000 1000 95 000 850 80 000 700 65 000 550 50 000 400 35 000 250 20 000 100 5 000 7 295229 50 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 1 5 2001 thru 12 30 2005 ROE Strategy S amp P500 Compounded Total Return 1 698 7 2 8 10 000 Starting Equity 179 870 45 10 281 83 Win Ratio 80 52 65 Avg of Stocks Held 4 5 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks Trading the Strategy All stocks are purchased with an equal dollar amount At the end of the holding rebalancing period 4 weeks the screen is run again keeping the stocks that remain qualified selling the stoc
25. cking winning stocks it isn t going to a f your strategy picks winners preclude you from ever having another loser On the contrary even some of the best strategies only have far more often than losers ara win ratios of 70 or 80 NOT 100 you can feel confident that your But if your strategy picks winners far more often than next pick will have losers once you find yourself in a losing trade you can a high probability of success quickly cut your losses and feel confident that your next pick will have a high probability of succeeding And that s why someone should use a Screener and a Backtester No Hype This book of screens will not be hype for the Research Wizard Stock Picking and Backtesting Software But should add that most of these screens would be impossible to do on any other program other than the Research Wizard e With over 8 600 stocks e 650 different fundamental data items e The ability to create you own custom calculations and comparisons e Access to historical data e Not to mention backtesting this is one of the most capable screeners available Please read on for some great stock picking strategies and ideas Win Ratio see Trading the Strategies and Calculating Performance Zacks Investment Research Inc gt Research Wizard www zacks com RW Vv Trading the Strategies and Calculating Performance Trading the Strategies All stocks are purchased with an equal dol
26. clicking the SoW folder Selecting the file sow_increasing pe Zacks Investment Research Inc Research Wizard www zacks com RW 34 Chapter Cheap Stocks and Big Returns a k a Breakouts This screen is also one of my favorites and one that wrote back in 2001 The premise behind this screen is to try and find cheap stocks stocks at or less than 15 that are trading at preferably consolidating at just under their 52 week high in an effort to get on board before they break out to new highs In other words want the stocks to be near their highs but most of all I m looking for stocks that have been turned back from their recent highs have consolidated I have found this screen to be an ideal strategy for finding their advances on their trek back to those highs and are just now starting to make a run at their 52 week J j 5 high again low priced stocks with a high r ility of lm a big fan of getting into basing patterns relatively p obab ty ee ae narrow trading ranges after an uptrend has been established Especially near recent price highs since stocks making new highs tend to make even higher highs And while it s true some of the stocks that make it thru this screen have already broken out have found this screen to be an ideal strategy for finding low priced stocks with a high probability of success Parameters gt Price lt 15 Cheap stocks Zacks Rank
27. comparison a hypothetical 10 000 invested in the S amp P during that time would have increased to only 10 281 83 or 2 8 See the next page for performance statistics Zacks Investment Research Inc Research Wizard www zacks com RW Upgrades and Revisions 2 continued The below chart and table shows the compounded returns from 1 5 2001 thru 12 30 2005 bt_sow_upgrades and revisions2 10 000 starting equity Return bt_sow_upgrades and revisions2 e S amp P 500 Return 75 000 650 70 000 1 t 1 7 t 600 65 000 550 60 000 500 55 000 450 50 000 400 45 000 350 40 000 300 35 000 250 30 000 200 25 000 150 20 000 100 15 000 50 10 000 0 5 000 50 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 1 5 2001 thru 12 30 2005 Upgrades and Revisions2 S amp P500 Compounded Total Return 560 2 2 8 10 000 Starting Equity 66 022 13 10 281 83 Win Ratio 74 48 65 Avg of Stocks Held 8 10 Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks Trading the Strategy All stocks are purchased with an equal dollar amount At the end of the holding rebalancing period 4 weeks the screen is run again keeping the stocks that remain qualified selling the stock
28. e a Stock Screener The short answer is Because there s over 10 000 stocks out there and you need a way to find the good ones The longer answer is Other than buying the stocks that are talked about on TV or written about in the paper not to mention tips from a friend how else are you going to find stocks that meet certain fundamental characteristics Even if you don t use a screener now most people still do their own screening one way or another They may hear that a stock has a certain Growth Rate or a certain S P E Ratio or Sales Surprise or whatever They then find Just because you narrow down themselves listening for or reading about stocks that 10 000 stocks to only a handful eet this criteria Ga a doesn t necessarily mean that Well if you want to find stocks that meet certain criteria you ve picked the best stocks ou can find them quickly and easily with a stock a sai on the planet But just because you narrow down 10 000 stocks to only a handful doesn t necessarily mean that you ve You might have picked picked the best stocks on the planet the worst ones You might have picked the worst ones But how will you know Backtesting Once you ve created a screen you can then backtest it to see how good or bad your screening strategy has performed In other words does your screen generally find stocks that go up once they ve been identified or does your screen g
29. e over 20 ve found that companies that are outperforming their Industries on earnings but are undervalued to their group in terms of valuations are great candidates Zacks Investment Research Inc gt Research Wizard www zacks com RW 14 Magic Numbers and Relative Valuations continued gt gt gt gt Parameters I ve created such a screen and have included the following parameters P E Using 12 month EPS lt XIndMean Stocks with P E ratios that are lower than the average P E s for their relevant Expanded X Industries Price Book lt XIndMean Price to Book values that are lower than the average P B values for their relevant Expanded Industries Current Price 52 week High gt 90 Companies with upward price momentum and that are trading within 10 of their 52 week high Change Actual EPS Q0 Q 1 gt XIndMean We re looking for EPS growth over the last quarter over quarter period to be greater than the average EPS growth for its relevant Expanded Industry And Change Actual EPS Q 1 Q 2 gt XindMean EPS growth over the previous quarter over quarter period to be greater than the average EPS growth for its relevant Expanded Industry In short it s looking for stocks that have shown greater EPS growth over the last two quarter over quarter periods than their Industry s average Price gt 5 Average 20 Day Share Volume gt 50 000 Average daily tradi
30. ed year and F 1 being the year before the last completed year gt Change Actual EPS Q0 Q 1 gt 0 We re also looking for positive EPS growth last quarter over the one before that QO being the last completed quarter and Q 1 being the quarter before the last completed quarter Zacks Investment Research Inc gt Research Wizard www zacks com RW Upgrades and Revisions 2 continued And gt Change Actual EPS Q 1 Q 2 gt 0 Positive EPS growth for the quarter over quarter period before the last completed quarter Q 1 over Q 2 In short the above two expressions demand two quarters of positive EPS growth And as a whole the 5 yr 1 yr and last 2 quarters of EPS growth paint a solid earnings picture over the longer term historical and most recent historical past Last EPS Surprise gt 0 The more likely a company has surprised in the past the more likely they are to surprise in the This screen by far has the most hoops to jump through future This is true for both positive and negative surprises So no negative surprises allowed Price Sales ratio lt 4 I had great success with the Price Sales ratio But the cumulative effect being between 2 3 and 4 In general a lower Price it has on finding the right stocks Sales ratio is better But went with 4 because it makes it one of the most didn t narrow down the stock selection so much rock solidest strategie
31. enerally find stocks that get buried once they ve been identified This is good stuff to know With backtesting you can see how successful your stock picking strategy has performed in the past so you ll have a better idea as to what your probability of success will be now and in the future Zacks Investment Research Inc gt Research Wizard www zacks com RW iii The Importance of Screening and Backtesting continued Of course past performance is no guarantee of future results but what else do you have to go by Think about it if you saw that a stock picking strategy did nothing but lose money year after year period after period stock after stock over and over again you get the point there s NO WAY you d want to trade that strategy or use that screen to pick stocks with Why Because it s proven that it picks bad stocks Sure it may turn around and start picking winners but it may also continue to pick losing stocks the way it always has One the other hand what if you saw a strategy that did great year after year period after period you know where this is headed you d of course would want to trade that strategy Why Because it s proven to be a profitable trading strategy And while it may start picking losers all of a sudden now that you re using it it may also continue to pick winning stocks just like it had been doing over and over before Keep in mind a screening and backte
32. ercentage earnings growth strong or not can potentially signal a period of Studies have shown that consolidation or slowdown which in turn can flatten out prices or send them lower almost all of the most successful stocks in the past But increasing percentage earnings growth consistently improving from the company s prior had displayed accelerated percentage of earnings growth can often be the earnings BEFORE their most difference between good stocks and great stocks 5 A F Impressive price moves The Parameters In this screen l m focusing on increasing percentage earnings growth and projected percentage earnings growth want the last two Quarter over Quarter EPS Growth periods to be greater than the previous periods and the next projected Quarter over Quarter EPS Growth period to be greater than the previous period as well For quick reference Q 0 the completed quarter Q 1 the quarter prior to the completed quarter Q 2 2 quarters prior to the completed quarter and etc Moving in the other direction Q 1 the current quarter Q 2 the next quarter and etc So the parameters would look like this gt Change Actual EPS Q0 Q 1 gt Change Actual EPS Q 1 Q 2 gt Change Actual EPS Q 1 Q 2 gt Change Actual EPS Q 2 Q 3 Estimated EPS Growth Q1 Q0 gt Change Actual EPS Q0 Q 1 In the Research Wizard you can compare an item to another i
33. est For example if the starting equity was 10 000 and the first period s gain was 10 1 000 the next period would invest with 11 000 If that next period is off 10 1 100 the period after that would invest 9 900 Also in this illustration and all of the other performance illustrations no consideration has been given to commission costs slippage or any other real world constraints The total return from its start date on 1 5 01 thru 12 30 05 is 326 1 with a win ratio of 65 42 winning periods out of 65 total periods A hypothetical 10 000 invested sans commissions and etc increased to 42 611 65 By comparison a hypothetical 10 000 invested in the S amp P during that time would have increased to only 10 281 83 Zacks Investment Research Inc Research Wizard www zacks com RW Something for Everyone Growth AND Value continued The below chart shows the compounded returns from 1 5 2001 thru 12 30 2005 Growth and Value Strategy 10 000 starting equity Return e Growth and Value Strategy e S amp P 500 Return 50 000 7 7 7 7 7 400 Tet 45 000 RTN 350 40 000 t l L APP 300 4 35 000 t f f sT i i ii t 250 ste rte 30 000 Hest ey ppp pete 200 25 000 Ath HH 150 gt x 20 000 t P l i li ji li ji 100 t fl 10 000 Lairig pdoesccesesee esoeesee s 0 5 000 50 Jan 01 J
34. ing Strat gies perseri citia giv uedehs titti ter aioe phe teed eana EEE ne end 45 Chapter 12 Additional Comments on Backtesting didxtetansKhiivnre hs anwir aD anana uiia 50 You Can Do U ii cciicceieds pete de akeek nane a ariei p kee a Ea a eA 52 Zacks Investment Research Inc Research Wizard www zacks com RW Introduction The Screens that go over in this book are just some of the screens that we ve published in our Screen of the Week articles Some of these screens are proven profitable trading strategies that created with and backtested in the Research Wizard And others are simply unique ways to screen for winning stocks In fact some of these screens shatter common myths on evaluating stocks complete with eye opening statistics There are also other screens that didn t make it into this book for no other reason other than we wanted to keep this book short and to the point It s not meant to be an encyclopedia of screens our editor kept reminding me Plus we didn t want to give all of our secrets away all at once But the screens presented here and the ones we left out are ALL available in the Research Wizard program So please read on and learn how you can pick better stocks that make more money now Zacks Investment Research Inc Zacks Investment Research Inc Research Wizard gt www zacks com RW ii The Importance of Screening and Backtesting Why Should Us
35. ing at the best average for their Industry performing stocks the average P E Ratio was In August of 2004 re ran this article but was now more than 2 times the using the choppy to lower market of 2004 lower at f 7 j that time as opposed to the bull market of 2003 The magic number of 20 statistics however remained virtually unchanged from August 2004 This time since the flat lower market lower then made it harder to find a large sample of stocks that increased by 50 or greater expanded the 6 month performance period to a YTD Year to Date period 8 months since it was August and reduced the minimum price down to 5 instead of 10 The volume qualifier stayed the same though average daily volume gt 50 000 shares The study showed that the beginning P E Ratios averaged out to be over 33 and increased to over 41 Again 1 1 2 times and more that 2 times the magic number of 20 And this time the P B value started at over 4 and rose to more than 5 with only 1 stock on that ist of 67 stocks having a Price Book Value of 1 or less But when compared to their relevant ndustries 70 had P E ratios under the average for their Industry and close to True there were some in there 60 had P B s under the average for their ndustry with P E s under 20 but om you would ve missed a lot of instead of thinking about low valuations as an fantastic winners if you excluded thos
36. iods Zacks Investment Research Inc 15 8 Performance Charts STATISTICS ex 10 000 start 1 01 07 05 5 it Total Compounded Return 2 02 04 05 5 95 Ae 7 8 Total Compounded Retum 3 03 04 05 5 07 39 32 Win Ratio 4 04 01 05 5 2 0 1 2 0 8 Winning Periods T otal Periods 5 04 29 05 5 7 8 38 40 Avg of Stocks Held 6 05 27 05 5 39 05 44 Avg Periodic Turmover 7 06 24 05 5 10 1 37 6 4 Avg Return per Period 8 07 22 05 5 40 1 0 5 0 Avg Winning Period 9 08 19 05 5 10 0 1 6 8 4 Largest Winning Period 10 09 16 05 5 44 4 0 0 4 Avg Losing Period 11 10 14 05 5 3 0 42 1 2 Largest Losing Period 12 11 11 05 5 15 8 21 137 Max Drawdown 13 12 09 05 5 1 7 22 05 Avg Winning Stretch of Periods Average Best Stretch of Periods 5 0 5 6 0 8 4 8 Ava Losing Stretch of Periods Up Markets Worst Stretch of Periods 8 5 0 30 26 64 Down Markets 5 50 02 21 23 Annualized bt_sow_roe2 103 1 10 8 84 2 20 000 19 000 18 000 17 000 16 000 15 000 14 000 4 13 000 12 000 11 000 10 000 9 000 012 3 4 5 6 T 8 9 10 14 12 13 And you can also see what stocks came thru in those periods too within the Backtest Details window You can take a look at one period at a time or all of the periods at once It even shows you how many times a stock qualified your screen and how many consecutive periods it qualified t
37. ized gross returns were up 16 9 with a win ratio of 65 The below chart shows the average annualized returns Upgrades and Revisions2 Strategy vs S amp P 500 130 0 120 0 4 110 0 4 100 0 4 90 0 80 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0 0 0 10 0 20 0 30 0 2001 2002 2003 2004 2005 m Upg amp Rev 2 55 8 42 1 108 5 49 3 16 5 m S amp P 500 10 7 18 3 27 9 8 8 9 7 Average Annualized Returns Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks For further illustration ran a continuous backtest starting on 1 5 2001 and going thru 12 30 2005 rebalancing the portfolio every four weeks also compounded the periods returns to greater simulate how one would invest For example if the starting equity was 10 000 and the first period s gain was 10 1 000 the next period would invest with 11 000 If that next period is off 10 1 100 the period after that would invest 9 900 Also in this illustration and all of the other performance illustrations no consideration has been given to commission costs slippage or any other real world constraints The total return from its start date on 1 5 2001 thru 12 30 2005 is 560 2 with a win ratio of 74 48 winning periods out of 65 total periods A hypothetical 10 000 invested sans commissions and etc increased to 66 022 13 By
38. ks are the worst as the Hot Maps graph assigns varying shades of green for most attractive and varying shades of red for least attractive See below Screen shot example of a Hot Maps graph Research Wizard The program also lets you chart your own regression analysis studies too with its Scatter Plot feature See below Zacks Investment Research Inc Research Wizard www zacks com RW 41 Something for Everyone Growth AND Value continued Screen shot example of a Scatter Plot chart Hlal et Scatter Piol Aaea F EPS Bekon RAI Girres La O j m fom lien E Hard Frie E Ati Frnt Dupa Ticker List Options al thew odd All Asie X M1 EPS Before NPS Sharah Annual fads Y amp Month end Price Very cool www zacks com RW Zacks Investment Research Inc Research Wizard Chapter Creating a Custom Consensus of Your Winningest Screens a Screen of Screens Every week in our Screen of the Week articles either go over a unique way to screen for stocks or l Il publish a proven profitable screening trading strategy For many customers interested in these trading strategies the only real decision is in choosing which one s to use Instead of choosing just one strategy create a Well instead of choosing just one why not look at them all and create a Custom Consensus of some of our or Custom Consensus of ou
39. ks that no longer qualify and buying the new stocks that newly qualify Zacks Investment Research Inc gt Research Wizard www zacks com RW Return on Equity ROE continued Get It H SoW This screen is available in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder Selecting the file bt_sow_roe More ROE CJ Profit Tracks The below charts and table depict the compounded returns There s also another ROE strategy available in the Research Wizard and this version generates on average of 25 30 stocks per period as opposed to the one above s 4 5 There are a few different parameters as well but the focus still remains on the ROE And it too has very impressive results and an excellent win ratio ROE Strategy Profit Tracks vs S amp P 500 ROE Strategy Profit Tracks 10 000 starting equity 90 0 Return ROE Strategy S amp P 500 Return 50 000 400 n yee a pete 75 0 46 000 360 0 44 000 t 340 E 60 0 42 000 320 3 40 000 jel 300 ira 38 000 yt 280 45 0 36 000 fot 260 34 000 4 H 240 E 32 000 tet lfl 220 amp 30 0 30 000 wey 200 z 28 000 wd L 180 150 26 000 a H 160 S 24 000 Pat HH 140 fa 22 000 reed H 120 a 0 0 20 000 oo 100 6 18 000 ot al tt 80 oO 16 000 nii mAT 60 15 0 14 000 n a 40 12 000 itt y OBA B eB
40. lar amount At the end of the holding rebalancing period the screen is run again keeping the stocks that remain qualified selling the stocks that no longer qualify and buying the new stocks that newly qualify Holding Rebalancing Period the amount of time a stock will be held once it qualifies the screen In most cases the holding rebalancing period is four weeks unless otherwise indicated Win Ratio the number of winning profitable holding periods out of the total number of available holding periods within the backtested time span For example if there were 39 winning holding periods out of a total of 52 available holding periods the win ratio would be 75 Calculating Performance At the beginning of each holding period a list of stocks portfolio is generated The period s returns are calculated using the change in price from the beginning of the holding period to the end of the holding period plus any applicable dividends The returns for the portfolio is the arithmetic mean of the returns for the individual companies in the portfolio Compounded performances when stated were calculated by taking a hypothetical starting equity amount and calculating the total return for the period Each subsequent period then used the resulting equity balance as its start to calculate that period s total return No consideration has been given to commission costs slippage or any other real world constraints in any of the
41. lect the impact that economic and market factors might have had on decision making if an adviser were actually managing a client s money The stocks in the Zacks Rank portfolios were available to Zacks clients before the beginning of each month monthly rebalancing Zacks Investment Research Inc gt Research Wizard www zacks com RW 16 Filtering the Zacks Rank continued In 2002 the Zacks 1 Rated stocks returned just over 1 with an average portfolio size of approx 200 stocks An impressive return when compared to the S amp P 500 s 22 But holding onto 200 or so stocks isn t doable for most investors But when adding the two aforementioned filters the portfolio size shrinks to a tradable 10 stocks on average and a phenomenal 18 1 return In 2003 the Zacks 1 list approx 200 stocks did nearly 75 in comparison to the S amp P 500 s almost 29 But the filtered Zacks Rank narrowed that list down to only 10 stocks on average with a return of over 66 And while it s true the filtered Zacks Rank produced Trade fewer stocks a smaller return than the full Zacks Rank 66 vs A 75 rebalancing only 10 stocks a month is far more for bigger returns manageable than 200 the filtered Zacks Rank In 2004 the annualized returns for the Zacks 1 Ranked stocks was up 28 8 with an average portfolio size approx 200 stocks The S amp P was up only 10 9 Yet the filtered Zacks 1 s annualized returns were
42. ng volume over the last 20 days is a minimum of 50 000 shares or greater Get It sw This strategy can be found in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder Selecting the file sow_relative valuations Try incorporating some of these ideas into your own stock picking strategies And while relative valuations aren t available in most screeners they are available in the Research Wizard Not to mention over 650 other fundamental database items too Zacks Investment Research Inc gt Research Wizard www zacks com RW 15 Chapter Filtering the Zacks Rank Tips on Trading the Zacks Rank l m sure most everyone reading this knows that the Zacks Rank is probably the most effective rating system out there Good markets or bad stocks with a Zacks Rank of 1 continue to outperform In fact since 1988 the average annualized return of Zacks 1 Ranked stocks is up over 34 2 a year But since there are typically over 200 stocks Ranked a 1 at any time 1988 37 46 16 20 it s important to know what other filters to apply to the Zacks Rank to 1989 36 09 31 70 generate a smaller more tradable watchlist 1990 2 97 3 10 Two filters in particular when added to the Zacks Rank of 1 not only 1991 79 79 30 40 narrows down the number of qualified stocks to a practical portfolio 1
43. nsistency of excellent performance The report that s generated will have the last 9 quarters lined up in the row from left to right It also continues out with the current quarter s estimated EPS Q1 and the next quarter s estimated EPS Q2 You can also arrange the columns in any order you wish so you can see the data you want in any way you want it With this display you can instantly see the EPS trend Company 3 Otr EPS Qtr EPS Qtr EPS Qtr EPS Qtr EPS Qtr EPS Qtr EPS Otr EPS Qu EPS Current Quarter LA Recent 80 Recent 7Q Recent 60 Recent 50 Recent 40 Recent 30 Recent 20 Recent 10 Recent Q0 ConsEst Q1 C FOOD DRUG RETAIL WHOLESALE Express Scripts 0 61 0 67 0 72 0 75 0 78 0 81 0 86 0 92 0 94 0 98 DRUGS Covance Inc 0 21 0 25 0 27 0 28 0 29 0 31 0 32 0 34 0 36 0 39 MEDICAL CARE Amsurg Corp 0 19 0 20 0 21 0 23 0 24 0 25 0 27 0 27 0 29 0 29 Centene Corp 0 30 0 35 0 38 0 40 0 43 0 44 0 45 0 47 0 50 0 52 Coventry Hither 0 40 0 44 0 45 0 55 0 70 0 74 0 76 0 82 0 93 0 94 Eresearch Tech 0 02 0 03 0 04 0 05 0 05 0 07 0 10 0 13 0 15 0 17 Lincare Hidgs 0 42 0 44 0 46 0 49 0 53 0 59 0 61 0 62 0 66 0 68 Renal Care Grp 0 29 0 31 0 33 0 34 0 35 0 35 0 37 0 38 0 42 0 44 Unitedhealth Gp 0 51 0 56 0 60 0 65 0 71 0 77 0 83 0 88 0 93 1 00 Wellpoint Hith 1 10 1 17 1 18 1 29 1 49 1 63 1 73 1 79 1 86 1 90 MEDICAL PRODUCTS
44. o longer qualify and buying the new stocks that newly qualify Get It so This screen can be found in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder Selecting the file bt_sow_filtered zacks rank Zacks Investment Research Inc Research Wizard www zacks com RW 18 Return on Equity ROE Part of a Winning Screening Strategy This screen uses the Return on Equity ROE measure as one of the main components in this strategy This too is one of my favorite strategies and one of the most popular ROE is one of the quickest ways to see whether a company is creating assets or gobbling up investors cash ROE income common equity For instance if the ROE is 10 then ten cents of assets are created for each shareholder dollar that was originally invested ROE Return on Equity is one of the quickest ways Knowing the company is generating assets on invested capital rather than burning thru it is a great starting to gauge whether a company Is point creating assets or gobbling up investors cash Parameters gt ROE gt 10 The median ROE value for all of the stocks in the Zacks Universe is under 10 So any company with shareholder equity less than this benchmark is disqualified Zacks Rank 1 The Zacks Rank which is considered by many to be the best rating system out there looks at upward earnings estim
45. oo so you can determine its turnover See the next page for a screenshot of the Backtest Details window Research Wizard www zacks com RW Screen shot of the Backtest Details window Backtest Period Details And all of the Backtest reports along with any other data can be easily exported to Excel with a click of a button And of course once in Excel you can then do even more analysis including creating charts and graphs like you ve seen throughout this book Zacks Investment Research Inc Research Wizard www zacks com RW 51 You Can Do it Try out some of our strategies for yourself or create your own And then backtest them to see how good they are Find the right stocks with right tools and START MAKING BETTER DECISIONS TODAY You can do it Zacks Investment Research Inc Research Wizard www zacks com RW 52
46. performance calculations Disclaimer Stock trading investing involves risk and you can lose some or all of your investment Hypothetical results may not always be duplicated in the real world Backtesting can also at times produce an unintended look forward bias In addition hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading not the least of which is the ability to withstand losses or to adhere to a particular trading strategy in spite of trading losses These are material points which can also adversely affect actual trading results Zacks Investment Research Inc Research Wizard www zacks com RW vi Chapter Upgrades and Revisions 2 A Winning Strategy for Beating the Market Let s get started with one of my favorite screening strategies Upgrades and Revisions 2 It focuses primarily on stocks with upward Earnings Estimate Revisions and Rating Upgrades It generates on average of approximately 8 10 stocks a month has an excellent win ratio 74 and has shown consistently impressive returns year after year after year The Parameters to this Strategy are gt Zacks Rank 1 The screen starts out by selecting only those stocks with a Zacks Rank of 1 Strong Buy With the Zacks Rank proving itself to be on of the best if not the best rating system out there avg annual return of 34 24 since
47. por usually tally up the total number of times they came no one stock should get a greater weighting than hose dupes and voila See the image to the right ll typically create this list old school style by simply writing down the stocks that qualify each screen on a piece mply list folio I ll hru But another just because it came thru more times They shou invested in equally ow even though two passes is enough for me some customers who run additional screens and r stock to qualify three or four times before it s cons Consensus pick But again two passes is fine for d all be have equire a idered a me By the way you don t have to write your lists down on a piece of paper if you don t want to You can also export your fr Wm but 7 t zalos Biy t Brle ads PEA Ee f LX 2 AG l is Git Z Sth pas N PEBE Sk ao Set Dox gt z 0 S it a Zacks Investment Research Inc ock lists to Excel or Notepad or Wordpad etc and tally all up in there Moreover with the Research Wizard s Scripting feature you can run as many screens as you want and have each list utomatically exported to an Excel file or even printed all with one simple click of a button Additional Comments Research Wizard www zacks com RW cmc 3 MENM 3 fle z PLEX 2 Ku g Vot 2 Ag 2 Fekg 2 vTiv2 poeg 3 SECC Tol Z As you
48. r pour winniigest stiategies or your winningest strategies This too is a great strategy for picking winning stocks from many diversified approaches Because aside from using the Zacks Rank for many of the screens there are many other filters layered on top in each screen to find the best stocks from different styles Most of the screens l m currently using in my Custom Consensus strategy are outlined in this book But they all come loaded with the Research Wizard program And many more The Consensus Strategy Screens are Z Big Money Chapter 6 Breakouts Chapter 8 EPS Growth Past and Present Chapter 11 Filtered Zacks Rank Chapter 3 Increasing Cash Flows Chapter 11 PEG SoW version not in book but in program ROE Chapter 4 Sales and Margins Chapter 11 TARALA AAA Upgrades and Revisions2 Chapter 1 Zacks Investment Research nc Research Wizard www zacks com RW 43 Creating a Custom Consensus of Your Winningest Screens continued The concept of the Consensus strategy is pretty easy but very powerfull Simply run each screen generating a list of qualified tickers for each screen and then count how many times a stock appears in all of those screens If it appears two or more times i e shows up on two or more screens it s now a part of the Consensus strategy portfolio of paper and then circling the duplicates Then I ll si And while it s not necessary to construct the
49. ross return of 41 4 with an average win ratio of 65 This strategy holds on average of 15 16 stocks in its portfolio each month Zacks Investment Research Inc Research Wizard www zacks com RW 38 Something for Everyone Growth AND Value continued n 2001 it showed an average annualized gross return of 42 6 with an average win ratio of 60 n 2002 the average annualized gross return was 19 1 with a 69 win ratio n 2003 it produced an average annualized gross return of 89 9 with a 71 win ratio n 2004 it produced an average annualized gross return of 43 8 with a 71 win ratio And in 2005 it showed an average annualized gross return of 11 7 and a 53 win ratio The below chart shows the average annualized returns Growth and Value Strategy vs S amp P 500 100 0 90 0 80 0 4 70 0 4 60 0 4 50 0 40 0 4 30 0 4 20 0 4 10 0 0 0 10 0 4 20 0 4 30 0 f 2001 2002 2003 2004 2005 m Growth and Value 42 6 19 1 89 9 43 8 11 7 m S amp P 500 10 7 18 3 279 88 9 7 Average Annualized Returns Hypothetical returns may not always be duplicated in the real world There is risk of loss in trading stocks For further illustration ran a continuous backtest starting on 1 5 2001 and going thru 12 30 2005 rebalancing the portfolio every four weeks also compounded the periods returns to greater simulate how one would inv
50. s gt Price gt 3 And finally all the stocks have to be trading at a minimum of 3 or higher Although with all of the items above the typical pick has an average stock price of approx 30 The Results ran a series of tests over each of the last 5 years 2001 thru 2005 rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four week periods This exercise was done to eliminate coincidence and verify robustness Over the last five years this strategy has shown an average annualized gross return of 54 4 a year with an average win ratio winning periods divided by the total number of periods of 74 And again it produces on average of 8 10 stocks for your portfolio each month To break it down further in 2001 the average annualized gross returns were 55 8 with an average win ratio of s 71 This screening strategy has shown consistently In 2002 the average annualized gross returns were k i 42 1 with an average win ratio of 68 impressive returns year after In 2003 the average annualized gross returns came yeah after year in at a whopping 108 5 with an average win ratio at 92 Zacks Investment Research Inc Research Wizard www zacks com RW 8 Upgrades and Revisions 2 continued In 2004 the average annualized gross returns came in at 49 3 with a win ratio of 72 And in 2005 the average annual
51. s that no longer qualify and buying the new stocks that newly qualify Get It CJ SoW This screen is available in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder SoW short for Screen of the Week Selecting the file bt_sow upgrades and revisions2 Zacks Investment Research Inc gt Research Wizard www zacks com RW 10 Upgrades and Revisions 2 continued More Upgrades and Revisions sw There are two other versions of the Upgrades and Revisions strategy available in the Research Wizard as well All stocks are purchased One of the versions generates on average of only 4 5 with an equal dollar amount stocks per period as opposed to 8 10 At the end of the All of the parameters are the same except that the holding rebalancing period Zacks Rank of 1 can t be more than four weeks old i e the screen is run again the stocks had a Zacks Rank of 2 or higher four weeks ago and have since been changed upgraded to a 1 keeping the stocks that within the last four weeks remain qualified selling the stocks that no longer qualify commission costs etc since every four weeks a and buying the new stocks This change will increase your turnover rate and completely new list of stocks is generated that newly qualify This was actually the very the first version of the Upgrades and Revisions strategy later revised
52. sting program isn t a box of magic But it s a great way to see what works and what doesn t BEFORE you put your money at risk I ll end this with a recollection of a conversation had with someone a while back who was stuck in a losing stock I asked him why he was still in it if it kept on losing money He said that he didn t think it would go much lower from here asked him if he thought it would go this low when he bought it He of course said no I then asked him if he thought itd go up from here His answer was probably not right away and then he added that it could possibly still fall a bit more from here told him there are plenty of stocks going straight up Why don t you get out of that one that s losing you money and get into a better one His answer was he didn t know of any better stocks to get into Zacks Investment Research Inc gt Research Wizard www zacks com RW iv The Importance of Screening and Backtesting continued I then asked him what if you did know of a better stock to get into would you do it His answer of course was YEAH But he quickly added that he didn t know how to find better stocks That last comment said it all He was in losing stocks because he didn t know how to pick better ones But if he had a proven profitable stock picking strategy he could Don t get me wrong just because you have a great strategy for pi
53. t least 10 or higher with an average daily trading volume of 100 000 shares or more Price gt 10 Average 20 Day Share Volume gt 100 000 In future articles added some additional filters to the screen ensuring that all of the stocks saw an increase in their earnings If prices are rising without an increase in earnings too there s no real reason for prices to continue to rise gt EPS Q 0 gt EPS Q 1 wanted to see an increase in the most recently completed Quarter s Earnings over the previous gt EPS Q 1 gt EPS Q 2 And an increase in the Quarter over Quarter s Earnings before that And for good measure wanted EPS F 0 gt EPS F 1 The most recently completed Annual Earnings to be greater than the Previous Year s Earnings EPS F 1 gt EPS F 0 Along with projections for This Year s Earnings to be greater than Last Year s also dropped the minimum price down to 5 or greater but kept the average 20 day share volume at 100 000 Price gt 5 Average 20 Day Share Volume gt 100 000 Use this screening strategy alone or with other criteria to help spot winning stocks BEFORE they become big winners Zacks Investment Research Inc Research Wizard www zacks com RW 33 Increasing P E s for Stocks on the Move continued Get It sw This screen is available in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double
54. tem This is done in the Calculation Expression feature and how the above customized items were created In addition to that I m only including stocks greater than or equal to 5 with an average daily share volume of 50 000 or more gt Price gt 5 Average 20 Day Share Volume gt 50 000 Zacks Investment Research Inc Research Wizard gt www zacks com RW 24 Earnings Acceleration continued Get It sw This screen is available in the Research Wizard by going to Screen on your Menu Bar Open Screen Definition Double clicking the SoW folder Selecting the file sow_earnings acceleration So when a company reports earnings take a look at their numbers and then see how their current EPS Growth stacks up to their previous period s EPS Growth and the period prior to that Moreover take a look at how their Earnings Growth is forecasted in their next reporting period as well Again with statistics suggesting that accelerated earnings typically appear BEFORE the most impressive price moves of a stock this is definitely a screen worth watching for finding winning stocks on the move More on Earnings Increasing Earnings Another screen like running in regard to earnings deals with Increasing Earnings if not necessarily the percentage of EPS Growth Parameters In this one I m looking for each of last 8 quarters of Earnings that s right 8 quarters to be greater than the previo
55. the best stock saw their P E ratio s increase by over stock doesn t the P E ratio will fall 20 divided by WU ire I Kroi Lo fala 1 25 16 If the earnings rise to 1 25 for instance and the If Earnings go up but Prices don t the P E ratio will decrease But typically as earnings increase so should prices lf the stock rises and its earnings stay the same the P E ratio will increase So if the stock is now at 30 and its earnings remain the same at 1 the P E ratio will have increased to 30 as well 30 divided by 1 30 If Prices go up but Earnings don t the P E ratio will increase But this scenario is probably short lived because the demand for a stock prices only goes up when earnings are going up or at least expected to But now let s say next quarter earnings come out and its four quarter combined numbers show the EPS at 1 25 with the stock increasing to 30 The P E ratio will now be 24 30 divided by 1 25 24 a 20 increase in its P E ratio from the first example If Earnings go up and Prices go up too the P E ratio will also increase The interesting dynamic is that as earnings increase so should prices And as forecasts for continued earnings arrive the demand for the stock should continue to send prices even higher This type of scenario higher earnings and higher prices has longevity and is common in most trends This increase in price and earnings is an ideal way to spot s
56. there that equate to stock picking success Two things in particular that hear over and over again when I m helping people with their screening strategies relates to P E Ratios and Price Book Values For some reason many people believe that P E Ratios of 20 or less and Price Book Values of 1 or less are these so called magic numbers Unfortunately statistics prove otherwise first wrote about this in June of 2003 In that article presented some very eye opening Mee Many people believe AE that P E Ratios of 20 or less and Price Book Values of 1 tirenn eS or less are magic numbers Looking at the best performing stocks to stock picking success over the last six months as qualified by T stocks that were trading at 10 or higher Unfortunately statistics at the beginning of the period and that have prove otherwise increased by 50 or greater the average P E Ratio over that time using 12 mo EPS Actuals was more than 50 That s more than 2 1 2 times the magic P E numbers True there were some in there with P E s under 20 but you would ve missed a lot of fantastic winners if you excluded those over 20 As for the average Price Book Value it was more than 4 Not 1 or even 2 but over 4 In fact not one of the stocks on that list 6 30 03 has a Price Book Value of 1 or less So if you insist on looking for stocks with low valuations P E P B try comparing them to their relevant Indus
57. tocks in favor and that are anticipated to continue to trend higher And instead of looking for nominal P E A meaningful increase in a changes screen for P E increases in excess of 20 which should provide the greatest upside potential stock s P E can potentially alert you to a significant price alert you to a new potential uptrend you can also use a and earnings event 20 increase in the P E ratio to alert you to potentially significant price and earnings events too Just like a 20 increase in the price of a stock can Zacks Investment Research Inc gt Research Wizard www zacks com RW 32 Increasing P E s for Stocks on the Move continued Parameters When first wrote about this in Jan of 2003 in our Screen of the Week series the Screen was using was gt P E Recent gt 1 2 P E Recent 3M Which means current P E s that are 20 or higher than their P E s from 3 months ago gt P E Recent lt 2 P E Recent 3M also included a limiting expression which made sure the current P E s were not greater than 100 higher It s important to note that most screeners don t have historical P E ratios or other historical measures for that matter but the Research Wizard does And with it you can then compare an item s value to its value from a different time period This is done in the Calculation Expression feature and how the above items were created The stocks also had to be a
58. tries Why Because while a small number of stocks traded at P E s of less than 20 with no stocks having P B s of 1 or less 70 of those stocks on that list of winners had P E s under the average for their Industry and 48 had P B s under the average for their Industry NN Very eye opening republished this article again in October of 2003 and August 2004 with updated stats Zacks Investment Research Inc gt Research Wizard www zacks com RW 13 Magic Numbers and Relative Valuations continued So absolute number try thinking about them as a relative measure from October 2003 Once again looking at the best performing stocks over the last six months from 10 2003 as qualified by stocks that were trading at 10 or higher at the beginning of the period and that have increased by 50 or greater the average P E Ratio was over 30 at the beginning of the study and over 45 at the end That s respectively 1 1 2 times and more than 2 times the magic P E number of 20 or less The Price Book Value started at over 3 and wound up at over 4 Again way over the magic number of 1 or less That time only 3 of the stocks on that list that s only 9 stocks out of 288 had a Price Book Value of 1 or less When compared to their relevant Industries however close to 70 of the stocks on that list had P E s under the average for their Industry and over 50 had P B s under the Look
59. us quarter s Earnings Quarterly EPS Q 0 gt Quarterly EPS Q 1 Quarterly EPS Q 1 gt Quarterly EPS Q 2 Quarterly EPS Q 2 gt Quarterly EPS Q 3 Quarterly EPS Q 3 gt Quarterly EPS Q 4 Quarterly EPS Q 4 gt Quarterly EPS Q 5 Quarterly EPS Q 5 gt Quarterly EPS Q 6 Quarterly EPS Q 6 gt Quarterly EPS Q 7 Quarterly EPS Q 7 gt Quarterly EPS Q 8 VYUYVUVVVY These were also created with the Research Wizard s Calculation Expression feature This one isn t so much concerned with the increasing percentage of earnings growth but rather the simple increase of earnings from one period to another The thing that makes this screen so tough i e a great stock picker is that it demands a consistency of excellent performance from a company over an extended period of time also want this quarter s Estimated Earnings to be greater than last quarter s Actual Earnings and the next quarter s Estimated Earnings to be greater than this quarter s Estimated Earnings Zacks Investment Research Inc gt Research Wizard www zacks com RW 25 Earnings Acceleration continued gt Q 1 Consensus Estimate gt Q 0 Actual Quarterly EPS Q 2 Consensus Estimate gt Q 1 Consensus Estimate Calculated Expressions And price and volume are The thing that makes this screen so tough i e a great Price gt 5 Average 20 Day Share Volume gt 50 000 stock picker is that it demands a co
60. weeks and started each run on different start dates so each test would be rebalanced over a different set of four week periods This exercise was done to eliminate coincidence and verify robustness Over the last five years this strategy has shown an average annualized gross return of 138 4 a year with an average win ratio of 69 And as the last parameter of the screen dictates it always only picks 3 stocks each period Zacks Investment Research Inc Research Wizard www zacks com RW 28 Big Money continued In 2001 the average annualized gross return was 128 9 with an average win ratio of 64 In 2002 the average annualized gross return was 262 1 with an average win ratio of 70 Over the last five years In 2003 the average annualized gross return was 2001 thru 2005 205 5 with an average win ratio of 79 this strategy has shown In 2004 the average annualized gross return was an average annualized gross 56 3 with an average win ratio of 65 return of 138 4 a year And in 2005 the average annualized gross return was 4 week rebalancing period 39 with an average win ratio of 67 The below chart shows the average annualized returns Big Money 4 Wk Rebal vs S amp P 500 275 0 250 0 225 0 200 0 175 0 150 0 125 0 100 0 75 0 50 0 Average Annualized Returns 25 0 m Big Money 128
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