Upgrades and Revisions -? A Winning Strategy for Beating the Market

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 8-10 stocks per month, has an excellent win ratio and has shown consistently impressive returns, 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)

• % Change Q1 Estimates over the last 4 weeks >= 0
  (earnings with fresh upward revisions)

• % 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 mo. Forward EPS Estimates (that’s right, 65)

• % Change Actual EPS Q0/Q-1 >= 0
  (positive EPS growth this quarter over last)

and ...

• % Change Actual EPS Q-1/Q-2 >= 0
  (positive EPS growth last quarter over the one before that, in other words, two quarters of positive EPS growth)

• % Change Actual EPS F0/F-1 >= 0
  (positive EPS growth this year over last)

• 5 Year Historical EPS Growth >= 17
  (yes, 17)

• Last EPS Surprise >= 0
  (no negative surprises allowed)

• Price/Sales ratio (actually, I had great success with the Price/Sales ratio being between 2, 3 and 4, but I went with 4 because it didn’t narrow down the stock selection so much... but 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:

I ran a series of tests over the last 4-3/4 year time span (2001 thru 2004 and YTD for 2005). I rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four-week periods. This exercise was done to eliminate coincidence and verify robustness.

Over the last four years, this strategy has shown an average annualized gross return of 63.7% a year, with an average win ratio (winning periods divided by the total number of periods) of 73%. And again, it produces on average of 8-10 stocks for your portfolio each month.

To break it down further; in 2001, the average annualized gross returns were 55.8% with an average win ratio of 71%.

In 2002, the average annualized gross returns were 42.1% with an average win ratio of 68%.

In 2003, the average annualized gross returns came in at a whopping 125.8%. (In fact, even the smallest run produced a gross return of over 100%.) The average win ratio came in at 87%!

In 2004, the average annualized gross returns were up 41.8% with an average win ratio of 68%.

And so far in 2005 (YTD - thru 9/9/05), the average cumulative gross return is 26.3% with 69% win ratio!

This strategy comes loaded with the Research Wizard program and is called: Upgrades and Revisions2.

Here are three stocks from this week’s list (9/26/05):

BHI - Analyst Report Baker Hughes, Inc.
FRK Florida Rock Industries, Inc.
NPO - Snapshot Report EnPro Industries, Inc.

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.
Click here and find out 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.