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Zacks created the first and best screening system on the
web and that`s what earned us the distinction as the "#1
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Each week Kevin Matras, of Zacks Investment Research, will
share with you another screen he has discovered that has
created winning results. Here are his latest findings:
"Return on Equity (ROE): Key to 52% Annual Return"
This week, I'll focus on another winning screening strategy that
is both easy to build and easy to use with our Research Wizard
program. This one uses Return on Equity (ROE) as one of the
main components in our strategy.
ROE is one of the quickest ways to gauge whether a company is
creating assets or gobbling up investors' cash.
ROE = income / common equity
For instance: if the ROE is 10%, then ten cents of assets are
created for each shareholder dollar that was originally
invested. Knowing the company is generating healthy returns
from invested capital rather than burning through that cash is
a good starting point to finding attractive companies.
So the parameters to this screen are as follows:
ROE >= 10% (Companies with no return on shareholder equity are
Zacks Rank = 1 (The Zacks Rank, which looks at upward earnings
estimates revisions, amongst other things, will get us into
companies whose forecasted earnings are getting stronger.)
Average Broker Rating = 1 (Since broker ratings are typically
skewed wildly to 'buy' and 'strong buy', I've decided to cancel
out any company where the brokers aren't on board.)
And for good measure, the price has to be at or above $5 with a
minimum of 50,000 shares traded a day.
I ran 5 separate tests, using a four-week rebalancing period
over the last 2-year time span. (Each run was rebalanced over
different four-week periods to eliminate coincidence and verify
The conclusion showed a robust strategy indeed, that
consistently outperformed the market and generated impressive
returns. Over the last 2 years, the average annualized gross
return is approx. 52%. It also has an excellent 65% average win
ratio (winning periods). And it's a very practical strategy to
implement since it typically generates on average of only 4-6
stocks per period.
Currently, there are 6 stocks on that list this week. Such as:
Doral Financial Corp.; Finance Sector
(SCHN - Snapshot Report) Schnitzer Steel; Basic Materials Sector
(WOOF - Snapshot Report) VCA Antech, Inc.; Medical Sector
I'd also like to add that when I increased the ROE from 10% to
20%, it had a noticeable increase in performance, although with
fewer stocks and slightly higher volatility. Sign up now for
your 2-week free trial to the Research Wizard and experiment
with these values on your own to find the right mix of risk and
reward that you're comfortable with.