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June 2010 

The currently featured screens are just some of the many screens in the Research Wizard that are especially hot right now. The screen styles are pretty diverse. But each one is producing market beating returns in the highly volatile environment we’re seeing now. Whether you use them individually as stand-alone strategies or combine them together into a portfolio, the returns have been very impressive — in fact, impressive enough to be featured in this installment of What's Hot.

Screens featured are: Big Money Zacks, PEG, Filtered Zacks Rank 5, and R-Squared EPS Growth.

Big Money Zacks Strategy (Price Momentum)
File Name: bt_sow_big money_zacks.und
Compounded Return (12/26/08 through 05/07/10): 427.6%

The Big Money price momentum screens have historically been some of our best performers through all types of markets.

BMZ

Big Money Zacks is 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 month periods.) However, with a Price to Sales ratio added to it, these movers are still considered ‘bargains’. The typical holding period (rebalancing period) is 1 week.

The seven items that go in this screen are:

Price/Sales ratio < .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 .5 means you’re paying 50 cents for each $1 in sales.)

Zacks Rank <= 3

This screens focuses only on stocks that have Zacks Rank of #1 (Strong Buy), #2 (Moderate Buy) or #3 (Hold).

Average Broker Rating < 2

(Strong Buys and varying degrees of ‘average’ Strong Buys. Since brokers’ ratings are typically skewed to the ‘bullish’ side, we want to make sure my picks have strong outlooks from the analysts’ covering them.)

Average 20 Day Share Volume >= 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.)

% 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.)

% 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.)

% Change in Price Over 4 weeks Top # 3

(Looking for the 3 best price gainers out of that top 10 list from above.)

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PEG Strategy (PE / EPS Growth Rate)
File Name: bt_sow_peg.und
Compounded Return (12/26/08 through 05/07/10): 212.3%

This strategy uses the PEG Ratio to find attractively priced stocks poised for price appreciation. The PEG Ratio is simply the P/E (Price divided by Earnings) of a stock divided by its 5-year projected growth rate.

PEG

PEG is one of the most popular ratios used to find strong value stocks which is especially useful in the market environment we are seeing now.

Too often investors think of value investing being the antithesis of growth investing. The beauty of using the PEG ratio is that you can find value stocks even amongst some of the hottest growth stocks.

The typical holding period (rebalancing period) is 1 week.

The three items that go in this screen are:

Zacks Rank <= 2

This screens starts by focusing only on stocks that have Zacks Rank of #1 (Strong Buy) or #2 (Moderate Buy).

Average 20 Day Share Volume >= 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.)

PEG Ratio (P/E F(1) / EPS Growth)  Bot # 3

(P/E to expected EPS growth using current fiscal year estimates and projected price growth. A PEG of 1.0 means that a stock is trading in line with it’s projected growth rate.

 

Filtered Zacks Rank 5 Strategy
File Name: bt_sow_filtered zacks rank5.und
Compounded Return (12/26/08 through 05/07/10): 155.5%

It's been another good year for the Zacks Rank and an even better year for the Filtered Zacks Rank 5 strategy.

Over the last 22 years, the Zacks #1 Ranks have averaged 28.17% a year. In 2009 alone (12/26/08 through 01/01/10), the Zacks #1 Ranks were up an astounding 91.1% (compounded) while the S&P 500 only returned 34.3%.

FZR5

This screen is similar to both the original Filtered Zacks Rank and the FZR2. It keys in on the same three items as the original: Zacks Rank = 1, % Change Q(1) Est. over 4 weeks, and the % Rating Change over 4 weeks. However, like the Filtered Zacks Rank2, it selects the best (top) 5 stocks with the best rating change (using the 4 week item) generating no more than 5 stocks whenever you run it. (Typically trades with a 1 week holding period.)

The three items that go into this screen are:

Zacks Rank = 1

As you know, the Zacks Rank is one of the best ranking systems out there. Since 1988, (over the last 21+ years) the Zacks #1 Ranked stocks have shown an average annual return of over 27.4% a year. This screen starts off by focusing in on these.

% Change Current Quarter Estimates Over 4 Weeks > 0

This item is important because, while the Zacks Rank already looks at the Current Year's Estimate Revisions and Next Year's Estimate Revisions, this added component looks at the more immediate future which is the Current Quarter. And by saying greater than zero, we're excluding any company with a negative revision.
 
% Change In The Average Broker Rating Over 4 Weeks = Top # 5

This means it's looking for the 5 stocks with the biggest or best change in their average broker rating. In other words, brokers have been upgrading the stocks. And while I don't really follow broker recs. per se', since I believe they're skewed to the upside, I do like to see the change in the rating. Are these guys getting more bullish or less bullish? This is good to know. So I want to make sure the average broker rating has gotten better, or at least not gotten worse, over the last week.

These three items combined obviously produce some very powerful results.

 

R-Squared EPS Growth Strategy
File Name: bt_sow_r_squared_eps_growth.und
Compounded Return (12/26/08 through 05/07/10): 59.4%

This strategy has been steadily beating the market year after year and this year is no exception.

Currently, this strategy is producing on average of 4.2 stocks to hold in your portfolio at a time. The typical holding period (rebalancing period) is 4 weeks.

It's a very easy strategy to trade and could even be classified as a somewhat conservative strategy. But the returns are anything but.

This is a nice addition to virtually anyone's portfolio mix.

RSQ

How This Strategy Works

The R-Squared Growth Rate is a measure of how close the actual earnings come in to the earnings growth on a regression basis.

In other words, how closely do the earnings conform to the regression line?

The range for an R-Squared value is between 0 and 1. The higher the value, the closer the data points are at matching the regression line. (In this example, the data points are EPS growth numbers.)

A value of 1 means the data is a perfect fit. Zero (0) is the worst.

The reason why someone would want to use this is to get a sense of the stocks ability to produce trend line EPS results. Of course there are no assurances that future data points won't veer off course. But knowing how closely matched the data points have been is good to know.

What's interesting is that the distribution of the R-Squared values for the stocks in the Universe (database of over 8,300 stocks) is an inverted bell curve (or well curve) distribution. 25% of the stocks had a value of .33 to .66. But roughly 38% of the stocks had lower values. And roughly 38% had higher values.

Usually, with a normal distribution, the majority of the data falls within the middle values with the smaller amounts of data falling on either side to form a symmetrical bell curve.

This distribution was the exact opposite.

In our testing we found that the outside values (> .66 to 1 for the 'best' fit and < .33 to 0 for the 'worst' fit) proved to be the most unreliable while the upper middle values significantly outperformed not only the other ranges but the market as well.

Parameters

  • Price >= 5
  • Volume (Avg. 20 Day Shares) >= 100,000
  • Zacks Rank <= 2 (Only Buys and Strong Buys)
  • R-Squared EPS Growth: In (range) between .50 and .66

(Above the median and one of the best tested ranges, i.e., EPS growth rates that show a 50% to 66% fit with the growth rate regression.)

  • PEG ratio <= 1
  • P/E Using 12 Month EPS: In (range) 5 and 15
  • % Change Price over 4 weeks > -5

(In order to qualify, a stock cannot have dropped more than -5% over the last 4 weeks.)

This strategy will typically produce a diverse set of stocks from different industries and market caps.

Archived Issues:

November 2009

Disclosure: Performance information for Zacks' portfolios and strategies are available at: http://www.zacks.com/performance