Fundamental strength is often a key criterion for many investors. A strong balance sheet and a history of profitability indicate that a company has the ability to meet its obligations and the flexibility to pursue opportunities for growth. Therefore, such stocks are often perceived as having a lower level of risk.
The lower level of risk often results in higher valuations. Occasionally, however, the markets undervalue a stock relative to its company?s fundamental strength. When this occurs, opportunities for profits are created. This Profit Track identifies such opportunities.
Backtesting results show just how successful this Profit Track has been. Double-digit returns have been achieved during each of the past four years. Through the end of January, 2007, this strategy continues to handedly beat the S&P 500.
Below you find all the parameters used in this strategy, as well as, detailed performance information.
PARAMETERS
Current Ratio > 1.5: A strong current ratio implies the company is more than able to meet all of its short-term obligations.
Deb/Equity < .5: Companies with manageable, or no, levels of debt are better position to prosper in the future than companies with high levels of debt.
ROA (Return on Assets) ? Average Last 5 Years (%) > 1.5: Companies must both have been historically profitable and have a record of effectively managing assets to build shareholder value.
Price/Sales < 1.0: Value investors commonly seek out stocks that trading at P/S multiples of 1.0 or lower.
PEG Ratio: P/E F(1)/EPS Growth < .9: Checking valuation against expected growth provides assurance that the stock is trading at a discount.
Zacks Rank < 3: Stocks whose earnings estimates are being revised materially downward are at greater risk for seeing their fundamental strength deteriorate in the future.
To see the list of stocks that currently pass this winning screen CLICK HERE
All the Profit Track strategies were created and backtested using the Research Wizard software from Zacks Investment Research. If you like this Discounted Fundamental Strength strategy but want to narrow down the list of stocks and even improve the performance, then you should start a free trial to the this powerful stock picking tool. Learn more about the Research Wizard and Free Trial offer.
The S&P 500 Index ("S&P 500") is a well-known, unmanaged index of the prices of 500 large-company common stocks selected by Standard & Poor's. The S&P 500 includes the reinvestment of all dividends, no transaction costs, and represents the gross returns before management fees.
The performance calculations for the Profit Track strategies were produced through the backtesting feature of the Research Wizard using the DBCMHIST database and consist of the total return (price changes + dividends) of an equal weighted portfolio. Returns are calculated on a specified periodic basis (four weeks for all Profit Track strategies except for Growth and Income and High Rank Value, which use a 24-week holding period) and assume no transaction costs. Each strategy is rebalanced at the start of each new period. Returns can be stated as either annualized or compounded.
Stock trading/investing involves risk and you can lose some or all of your investment. Hypothetical or backtested results may not always be duplicated in the real world. Backtesting can at times produce an unintended look-ahead bias. Results can also at times be over or understated due to the exclusion of inactive companies. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading, not the least of which is the ability to withstand losses or to adhere to a particular trading strategy in spite of trading losses. These are material points which can also adversely affect actual trading results. The backtested results prepared for the Profit Track strategies were done using the DBCMHIST database and consisted of only active companies. The Research Wizard program has been aligned, to the extent possible, to eliminate look-ahead bias. Zacks however cannot make any guarantees in regard to this or any other possible limitation.
Performance information for other Zacks. portfolios and strategies is available at http://www.zacks.com/performance
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