6 Criteria for Picking Great Stocks
by Steve ReitmeisterJanuary 21, 2011 | Comments : 0 Recommended this article: (0)
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We've come a long way in just two short years. The market has rebounded ferociously from the lows of March 2009 and there is a lot less talk of double dips.
More and more signs point to this being a solid economic recovery, which should be good for stock investors. Yet it would be foolish to say that 2011 is without its share of risks.
So is your portfolio built to profit in the unique investment landscape that lies ahead?
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 Top 10 Stocks for 2011 service, which was just made available. This stock selection process is called the Zacks Method for Investing.
The 6 Criteria for Picking Great Stocks (aka The Zacks Method for Investing)
1) 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.
2) 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.
3) Recent Analyst Upgrades Our research also 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.
4) 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.
5) 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.
6) 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 estimates 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 right now is through our Zacks Top 10 Stocks for 2011 service. Not only do these stocks have the right stuff according to our model, but then there is one last important piece of the process. That is the human element.
Our Director of Research, Sheraz Mian, is hand picking the 10 best stocks that fit together as a powerful portfolio that is perfectly suited for today's investment landscape. Click the link below if you would like to gain access to these top picks for the year ahead.
Executive VP, Zacks Investment Research
Steve is the Executive Vice President in charge of Zacks.com and all of its profitable services for individual investors. The newest of these services is Zacks Top 10 Stocks for 2011.
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