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Unless you've been in the stock market for some time, you've probably never heard of Martin Zweig. Whether you have or not, I'm about to explain why it's a name worth remembering.
Almost two years ago, I wrote an article with a stock-selection screen based on Zweig's strategies. The screen, run Aug. 11, 2004, turned up 17 stocks (excluding one that had already agreed to be acquired). Last week I checked on the performance of that portfolio.
Let's take a trip back in time. After its first year (as of Aug. 11, 2005), the portfolio had recorded an impressive 40% average return, compared to 15% for the S&P 500 ($INX). But the story is even better than it sounds. Often, even though recording strong average returns, such portfolios usually include a few hefty losers. But, in this case, only two stocks dropped, with the biggest loss totaling only 11%.
After the first year, the portfolio lost steam. As of June 23, it had averaged a 43% return since its August 2004 inception, vs. 16% for the S&P 500. While the average return is still impressive, the results were more volatile, with bigger winners and more weak performers.
Given those results, the Zweig screen rates another look. But first, some background on Martin Zweig.
Although no longer in the limelight, Zweig, who has a Ph.D. in finance, is well known to market professionals for his disciplined approach to the market. His now-discontinued Zweig Forecast newsletter was ranked No. 1 for risk-adjusted returns over the 15 years that it was tracked by Hulbert Financial Digest.
He has examined the relationship between stock-market action and just about every conceivable economic or market indicator. In fact, he's credited with inventing the put-call ratio market sentiment indicator.
Zweig described the results of much of his research in his best-selling book, "Martin Zweig's Winning on Wall Street," which is still in print. Much of the book covers Zweig's market-timing indicators, but he also details his stock selection strategies.
It's all in the numbers
When it comes to picking stocks, Zweig is strictly a numbers guy. As he put it, "If a company can show nice consistent earnings, I don't care if it makes broomsticks or computer parts." Zweig focuses on three main criteria to pinpoint potential winners:- Strong historical sales and earnings growth.
- A reasonable price.
- Strong price action relative to the market.
Zweig avoids stocks that have recently disappointed the market, and he doesn't like firms carrying high debt. While he doesn't want to overpay, Zweig is willing to pay more for strong stocks. Says Zweig, "buying on strength gives you an edge. You must pay a premium, but you increase the probability of being right." I'll fill in the details as I describe my screen for finding stocks meeting Zweig's criteria. (Click here to go to MSN Money's Stock Screener.)
I'll start with sales and earnings growth, which are Zweig's top priorities.
Long-term growth
Zweig wants to see consistent sales and earnings growth, going back four or five years. He considers 15% annual earnings growth acceptable, but prefers more. In his book, he gives numerous examples of stocks with 30% to 50% historical growth rates.I require at least 15% average annual sales and earnings-per-share growth, measured over the past five years. Try increasing the minimums for either or both to 20% or even 25%, if you get too many hits.
Screening parameter: (5-year) Annual EPS Growth Rate >= 15%
Screening parameter: 5-Year Revenue Growth >= 15%
Recent growth
Zweig avoids stocks with decelerating growth rates. He wants to see the most recent quarter's year-over-year EPS growth rate in the same ballpark as the long-term rate and, ideally, higher. However, he's not dogmatic and is willing to cut a stock a little slack, depending on conditions.I require the most recent quarter's year-over-year EPS growth to be at least 75% of the long-term growth rate.
Screening Parameter: EPS Growth Qtr vs. Qtr >= 0.75* (5-year) Annual EPS Growth
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