6 Criteria for Picking Great Stocks
by Steve ReitmeisterNovember 27, 2009 | Comments : 0 Recommended this article: (0)
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We've come a long way, in a short period of time. The market has rebounded ferociously from the March lows. And overall the S&P 500 is up +22.5% on the year (as of 11/23/09). Most importantly, there are signs of an economic rebound that has allowed us to dodge a bullet called the 2nd Great Depression.
So is your portfolio built to profit in this new landscape? Or are you still mostly in cash? Or worse yet, are you still holding on to the same stocks that collapsed during the bear market, hoping they will eventually get back to breakeven?
If you're feeling a little uncertain about your current investment strategy, you're not alone. Many investors have watched the market rebound without a meaningful rebound in their financial well being. But, that's not an excuse to leave it that way.
Now is the Time to Act
There is no better time than now to re-build your portfolio to profit in the days ahead. If you have a stock selection process that has helped you outpace the market in years past then feel free to stop reading this article because you are all set.
For the rest of you, might I suggest a process we use here at Zacks Investment Research that looks at 6 different factors. Each one individually will help you pick better stocks. However, when you combine them together it creates a huge advantage for the investor.
This process lies at the heart of our Zacks Elite service, which has consistently outpaced the market since inception in 1996. This stock selection process is called the Zacks Method for Investing.
The 6 Criteria for Picking Great Stocks (aka The Zacks Method for Investing)
- Valuation - Study after study proves that stocks with low valuations will outperform the market over the long haul. Therefore, we prefer companies that are trading with P/Es and Price to Book (P/B) multiples below their peers.
- Management Effectiveness - We evaluate the fiscal health of the company, with a particular emphasis on how effectively it is managed. Our research shows that Return On Equity (ROE) is the best measure of this. So we seek out companies generating an ROE that is superior to their industry peers.
- Recent Analyst Upgrades Our research clearly shows that stocks that have recently received a recommendation upgrade from brokerage analysts will continue to outpace the market. Most of that benefit is felt in the short run. However, quite often a stock that receives one upgrade is likely to get more in the future, which keeps pushing the stock higher.
- Best Industries - Even the best-looking stock will underperform the market if it's in an out-of-favor industry. That is why we overweight stocks from the best industries, and sectors. And there is no better guide to choosing the right groups than the Zacks Industry Rank, which focuses on the earnings estimate revisions for all the stocks in the industry.
- Attractive for the Long Term We look for stocks with a Zacks Recommendation of "Outperform". This is a very effective long-term indicator that suggests a stock is likely to beat the market over the next 6 months. The main ingredient behind the Zacks Recommendation is positive changes in a company's earnings estimates.
- Timeliness - There is no better timeliness indicator than the Zacks Rank. We look for Zacks #1 Rank ("strong buy") and Zacks #2 Rank ("buy") stocks. These signals tell us that now is a good time to get into the stock. Just like the Zacks Recommendation it focuses on stocks with the best earnings estimates.
(You probably noticed that items 4, 5 and 6 all concentrated on earnings estimate revisions. Why? Because our founder Len Zacks proved many years ago that this is the most powerful force impacting stock prices. So we have found a number of ways to harness that information to pick better stocks no matter what direction the market is headed.)
Where to Find This Information? .Where to Find the Stocks Too!!!
The first 3 of these criteria are free and widely available from Zacks.com and other investment websites. If you just concentrated on these elements you would be much better off than you are now.
The last 3 criteria are proprietary to Zacks Investment Research and only available through our premium subscription services. Adding these 3 elements to the free ones above will put an almost unfair advantage in your hands.
The best way to tap into all 6 elements is through our Zacks Elite service. Our Focus List portfolio is currently filled with 43 stocks that have the right stuff for the long haul. Plus we have a Timely Buys portfolio that currently has 11 stocks set to outperform over the next one-to-three months. I invite you to see all of these stocks through a free trial to Zacks Elite. Just click the link below.
Executive VP, Zacks Investment Research
Steve is the Executive Vice President in charge of Zacks.com, ZacksElite.com and all other services geared towards individual investors. He joined the firm in 1999 to become Managing Editor of the Zacks Advisor (now called Zacks Elite) and still considers it "his baby". Learn More about Zacks Elite.
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