This week’s screen has something for both growth investors and value investors alike.
Growth investors focus on companies with great earnings growth, but that alone is no longer good enough for many stock pickers. They want good growth at reasonable prices (low P/Es). And while value investors 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.
The screen I’m running this week is as follows:
- Companies with five-year historical growth rates to be in the top 20th percentile of all companies.
(Using a uniform rank of 1-99—99 being the best growth rate—I screened for stocks ranked 80 or better.)
- Companies that also happened to have the lowest P/Es, too, lower than 80% of all other companies.
(Using a Uniform Rank of 1-99 again—this time, 99 having the lowest P/Es—I screened for stocks ranked 80 or better.
- I then required those stocks to be trading at or above $5,with average daily trading volumes of 100,000 shares or more.
- And a Zacks Rank of 2 or less.
(Only “buys” and “strong buys” allowed).
Here’s three stocks from this week’s list (6/17/08):
ACGL Arch Capital Group.
AVT Avnet, Inc.
SPAR Spartan Motors, Inc.
Incidentally, this screen back-tested very well, too. And while it wasn’t designed to be a trading strategy per se (15 to 20 stocks on average is a lot of stocks to trade every month for most investors), this screening strategy beat the market in every year for the last seven years (2001 through 2007). I ran a series of tests over the last six-year time span using a four-week rebalancing period. Each run was rebalanced over a different set of four-week periods to eliminate coincidence and verify robustness.
In 2001, this screen showed an average annualized gross return of 42.6 percent; in 2002, it was 19.1 percent. In 2003, it was a whopping 93 percent; in 2004, it came in at 40.4 percent. 2005 was up 11.9 percent, 2006 was 16.8 percent, and in 2007 it was up 14.1 percent. And so far in 2008, (Y-T-D through May), its average compounded gross return is up over 7 percent.
This screen is an excellent way to find good growth companies that also have low valuations.
Check it out for yourself and get the rest of the stocks on this list. See where your stocks rank compared to the other stocks out there, and test your own strategies and see how they’ve done. Find out what works and what doesn’t. It can all be done with the Research Wizard stock-picking and bac-ktesting program. Sign up now for your two-week free trial and learn how: http://researchwiz.zacks.com
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.