This week I’m going to highlight a screening strategy that primarily focuses on stocks with increasing earnings estimates and rating upgrades.
Studies have shown that “earnings estimate revisions are the most powerful force driving stock prices.” And stocks receiving upward EPS revisions will generally see the brokers that cover them upgrade their ratings too.
This screen generates (on average) only eight to 10 stocks per month, has an excellent win ratio, and has shown consistently impressive returns year after year after year.
The parameters to this strategy are:
- Zacks Rank = 1 (The Zacks Rank is probably one of the best—if not the best— rating system out there.)
- Percent change Q1 estimates over the last four weeks >= 0 (earnings with fresh upward revisions)
- Percent rating change over 4 weeks >= 0 (Since analysts have such a huge upside bias, I’m excluding anything that’s been even slightly downgraded.)
- P/E using 12-month forward EPS estimates <= 65 (That’s right, 65.)
- Percent change actual EPS Q0/Q-1 >= 0 (positive EPS growth this quarter over last) and Percent change actual EPS Q-1/Q-2 >= 0 (positive EPS growth last quarter over the one before that, or, in other words, two quarters of positive EPS growth)
- Percent change actual EPS F0/F-1 >= 0 (positive EPS growth this year over last)
- Five-year historical EPS growth >= 17 (Yes, 17.)
- Last EPS surprise >= 0 (No negative surprises allowed.)
- Price/Sales ratio <= 4 (Actually, I had great success with the Price/Sales ratio being between two, three and four, but I went with four because it didn’t narrow down the stock selection so much. If you want to narrow it down, tighten the ratio up a bit.)
- And finally, the stocks all had to be trading at a minimum of $3 or higher.
The Results:
This strategy has beaten the market every year for the last six years, and it’s doing it again (so far) this year.
Thus far in 2007 (thru October 2007, using a four-week rebalancing period), this strategy has shown an average gross total compounded return of 31.1 percent.
This strategy comes loaded with the Research Wizard program, and is called Upgrades and Revisions2.
Here are three stocks from this week’s list (10/30/07):
AIRM Air Methods Corp.
GTI Graftech, Intl.
KCI Kinetic Concepts
Get the rest of the stocks on this list, and start using this winning strategy in your own portfolio. You can do it. Sign up now for your free trial to the Research Wizard and start making better decisions today.
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.
