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 not sufficient for many stock pickers. They want good growth at reasonable prices (low P/E’s).
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: Focus on the companies with the highest growth rates and 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 rates), I screened for stocks ranked 80 or better.
- Companies that also happened to have the lowest P/E’s—lower than 80 percent of all other companies. Using a uniform rank of 1-99 again (this time 99 having the lowest P/E’s), I screened for stocks ranked 80 or better.
- I then required those stocks to be trading at or above $5 dollars, with an average daily trading volume of 100,000 shares or more.
- A Zacks Rank of 2 or less. (Only “buys” and “strong buys” allowed.)
Incidentally, this screen back-tested very well too. In fact, it beat the market in every year for the last 6 years (2001 through 2006). I ran a series of tests over the last five years, 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; and in 2005, it was up 11.9 percent. It was 16.8 percent in 2006, and so far in 2007 (YTD through 8/31/07), its average compounded gross return is up 21.7 percent.
This screen is an excellent way to find good growth companies that also have low valuations.
There are 22 stocks that made it through this week’s screen (10/16/07):
Check it out for yourself. See where your stocks rank out of all of the other stocks out there, 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 back-testing program. Sign up now for your two-week free trial and learn how.
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.
