Did You Know?
by Kevin MatrasOctober 23, 2009 | Comments : 0 Recommended this article: (0)
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We've all heard the old adage: knowledge is power.
It's a great saying because it's true.
And that saying couldn't be truer than when it comes to investing.
Take a look at your last big loser. After analyzing what went wrong, you probably discovered some piece of information that – 'had you known that, you never would have gotten into it in the first place'.
I'm not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard.
I'm talking about things that you could have known about or SHOULD have known about before you got in.
Did You Know?...
- Did you know that roughly half of a stock's price movement can be attributed to the group that it's in?
- Did you also know that often times a mediocre stock in a top performing group will outperform a 'great' stock in a poor performing group?
- And did you know that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of over 5 to 1. Five to one!!!
- And did you also know that the top 10% of industries outperformed the most?
Was your last loser in one of the top industries or in one of the bottom industries?
If it was in one of the bottom industries, you shouldn't have taken a chance on something with a reduced probability of success.
That's what is meant by 'knowledge is power'. Knowable things that you need to know.
That's not to say that stocks in crummy industries won't go up -- they do. And that's not to say that stocks in good industries won't go down -- because they do too.
But more stocks go up in the top industries and more stocks go down in the bottom industries.
And since there are over 10,000 stocks out there to pick and choose from, why settle for one with a reduced chance of making money?
Did You Know?...
- Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
- Did you also know that stocks with crazy high growth rates test almost as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it still got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
Did You Know?...
- Did you know that the top performing stocks each year will usually see their P/E ratios more than double from where it started?
- Did you also know that, historically, most of the best performers began their runs with P/Es over the 'magic' number of a P/E ratio of 20?
- And did you know that an even greater majority of the top performers finished with P/E ratios of well over 20?
If you only confine yourself to stocks with P/Es under 20, you'll be consistently keeping yourself from getting in on some of the best performing stocks each year.
Moreover, knowing that the top performers will typically see their P/E ratios rise (more than 100%) during their move, you'd be getting out the moment those stocks get above 20.
So many people I speak to believe that a P/E ratio of less than 20 is the key to success. But statistics prove otherwise.
Don't get me wrong, lower P/E ratios in general are a good thing. But since different industries have different P/E ratios, it makes sense to do relative comparisons.
For example: two popular industries right now are Gold and Energy. But did you know that the median P/E ratio for Gold Mining stocks is 53? Whereas the median P/E ratio for Oil & Gas Drillers is closer to 10? A P/E of 20 would keep most of the best Gold Miners from even showing up on your screen. And if you found an Oil & Gas Driller at 20, that P/E would be significantly more expensive than the norm for that group.
If you find yourself wondering why you never catch a big winner, or worse, why some promising stocks blow up on you – take note of their P/Es – you might be limiting your own success.
Did You Know?...
- Did you know that adding a simple valuation metric can turn a good Price Momentum screen into a great one? That's what we did with our Big Money Zacks screen, which is up over 200% this year.
- Did you know that by adding two additional filters to the Zacks #1 Rank stocks, you can narrow that list down from 200+ stocks to a more manageable 5 stocks? That's what we did with our Filtered Zacks Rank 2 screen, which is up over 84% this year.
- Do you know what an R-Squared Growth rate is? What if you did? We have a screen that utilizes this seldom-looked-at item that is not only up more than 36% this year, but was also up 15.9% in 2008's bear market while the S&P 500 was down -37%. That screen is aptly called the R-Squared EPS Growth screen.
Do you know how well your stock-picking strategies have performed?
Whether good or bad – do you know why?
Do you know if your favorite item to look for is helping you or hurting you?
Get the answers to these questions and more. And imagine what else you’ll find.
I discovered all of these things above with the Research Wizard (including the one that has averaged gains of +82.5% per year). If you have a question, plug it in and get your answer. Find winning strategies. Or create your own. And test virtually any idea you can think of. Now you can. Click here to learn more.
Thanks and good trading,
Zacks VP Kevin Matras is our chart patterns and stock screening expert. He also personally developed many of the built-in market-beating strategies that come with the Research Wizard.
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