4 Proven Stock Picking Strategies

On virtually every investment website you can find reams of articles touting some great ways to pick stocks. I have no doubt that each article is well written and appears to bring quality insights to the fore.

But how many of these articles are based upon scientific research that proves that these strategies work? And how many of them are absolutely…positively…100% wrong?

Unfortunately the vast majority of these articles fall into that latter camp, which leads investors down a very unprofitable path. Below I will share with you 4 strategies that have clearly proven to outperform the market over the last ten years. Meaning they have worked for investors during all kinds of market conditions, including the last 2 bull and 2 ferocious bear market cycles.

Research Says…

Our study of these stock-picking strategies covers the ten-year span from February 11, 2000 to February 26, 2010. Instead of just using the S&P 500, we broadened our study out to nearly 3000 stocks that met the following criteria: Stock price greater than $1 per share with average daily trading volume of 100,000 or more. The average annual of these stocks was +7.4% over that stretch. Be sure to keep this in mind as you compare it to results of our 4 profitable strategies.

(Note that I am listing the strategies from least to most profitable. So make sure you read on to see them all).

Strategy 1: Broker Upgrades and Downgrades

Broker ratings got a bad rap after the tech stock bubble popped in 2000. Since then there is clearly value in buying and holding stocks that have recently gotten a rating upgrade and avoiding those that have received a downgrade.

Upgrade within last 4 weeks produced a +10.8% annual return (3.4% better than average)
Downgrade within last 4 weeks produced a +0.8% annual return (6.8% worse than average)

Strategy 2: Low Price to Book Ratio

Ben Graham, the father of value investing and Warren Buffett's mentor, was a big fan of stocks with low Price to Book ratios. Not surprisingly, this method has stood the test of time.

Price to Book less than or equal to 2 produced a +14.0% annual return (6.6% better than average)
Price to Book greater than 2 produced a +2.4% annual return (5.0% worse than average)

Strategy 3: Low Price to Sales Ratio

This is the too-oft forgotten cousin of the PE ratio. But as many professional investors will tell you, it's a lot easier for CFOs to manipulate quarterly earnings numbers than it is to contort sales figures. That is why the Price to Sales ratio is so effective at spotting good stocks.

Price to Sales less than or equal to 1 produced a +17.8% annual return (10.4% better than average)
Price to Sales greater than 1 produced a +2.0% annual return (5.4% worse than average)

Strategy 4: Low PEG Ratio

The PEG ratio is the PE of the stock divided by the projected Growth rate. It provides a great way to compare the relative valuation of stocks - no matter the growth rate. Are you getting tired of all these value-oriented strategies yet? Well, if being profitable is wrong, then I don’t want to be right ;-)

PEG less than or equal to 1 produced a +18.2% annual return (10.8% better than average)
PEG greater than 1 produced a +5.6% annual return (1.8% worse than average)

How to Improve Upon These Strategies

Most free stock screeners on the web will help you find picks that meet these criteria. The problem is that after you do the screen, you will still be left with the daunting task to select from a list of hundreds of viable candidates. In fact, the Price to Book less than or equal to 2 strategy has averaged 1401 acceptable stocks each time the screen was run.

Gladly there is an easier and even more profitable way to harness these strategies. And that way is through some of the custom strategies Zacks built into the Research Wizard product, such as:

• Filtered Zacks Rank 5 harnesses the Broker Upgrades
  +64.7% average annual return with just 5 stocks

• Winning Ways strategy harnesses the Price to Book ratio
  +35.5% average annual return with just 5 stocks

• Big Money strategy harnesses the Price to Sales ratio
  +82.1% average annual return with just 3 stocks

• PEG strategy harnesses (you guessed it) the PEG ratio
  +59.2% average annual return with just 3 stocks

So if you want to discover these screens and their current stock picks, then take me up on the free trial offer below.

About the Research Wizard free trial

Best, Regards,

Steve

Stephen Reitmeister
Executive VP, Zacks Investment Research

Steve is in charge of Zacks.com and all of its subscription services for individual investors. He remembers back ten years ago when Research Wizard was only sold to professional investors. Now in 2010 it is Zacks' largest service for individual investors. Not surprising when you consider the unprecedented power it brings into the hands of the average investor.

About the Research Wizard