It's that time of the year again...yep, it's Fall! You know how I can tell? The gourds and dried corn stalks (and don't we all love to decorate everything--including our cars--with gourds and corn stalks?) have appeared at the farmer's market, I've begun to stress out about finding the perfect Halloween costume and my neighbor across the street has put up his "scary" yard decorations. On second thought, maybe he's really having a yard sale because it just looks like a bunch of dusty stuff from his attic. That has to be the case, because what does a seesaw have to do with Halloween anyway?
Regardless of what my wacky neighbor is up to, watching those red, yellow and brown leaves fall from trees and feeling those cool, crisp evenings remind me of the stock market. And don't they remind everyone of the market? If they don't, then you're clearly not a market historian, nor did you read my article from last year: Goblins, Ghouls, and the Halloween Effect.
I'm sure everyone has heard the investing adage: "Sell in May and Go Away," but perhaps what you haven't heard is when to come back. Well now's the time! Research has shown that you could improve your annual average return by 4-8% by simply being in the stock market from late October through April and avoiding the other months.
Let's Add a Dash of Smarts
Most of the research surrounding the Sell in May and Halloween Effect focuses on buying futures or ETFs to capture the optimal time to be in the market. But instead of simply buying the entire farm, let's buy the best cow, horse, chicken, gourd and dried corn stalk the farmer has. We only want the best he has to offer. Why waste our time buying the entire lot which also contains a few duds. The same holds true for the stock market. Why would you want to buy all the stocks in an index or an ETF when some are going to outperform others? Don't you simply want the best?
That scream you just heard wasn't the zombie under your bed (he actually makes more of a groaning sound). That scream was a resounding "Yes!" shouted out by investors around the world who want only the best stocks. A lot of questions generally follow a scream. So after you shout "Yes!" you're probably going to ask "But how do we separate the wheat from the chaff?"
How to Find the Best
The Zacks Research Wizard is your one-stop shop. It contains information on corporate financial statements, stock prices, earnings estimates and stock ratings on thousands of companies--all at your finger tips. There are very few software programs available to the individual investor that has all the information and history that the Research Wizard has. What's more, you can actually backtest your ideas to see what works and what doesn't. Thats a priceless feature that will save you a significant amount of tuition from the School of Hard-Knocks.
Here's a way to use the Research Wizard to find some of the smartest stocks:
- First, create a liquid, investible set of the stocks with the largest 3000 market values and average daily trading volume greater than or equal to 100,000 shares (if there's not enough liquidity, it'll be hard for you to trade.)
- Because a lot of stocks under a certain price are difficult to trade, keep only those stocks trading above $5/share.
- Add another filter by selecting only those stocks with Zacks Rank less than or equal to 2. (Any Zacks Rank 3 or greater is either at or under market performance.)
- Let's also require the company to have an average broker rating better than a 2. (It's good for Street research to also think the stock is a good buy.)
- Finally, we'll select those stocks with the best Enterprise Value/EBITDA Ratio. (We want the lowest, yet positive EV/EBITDA ratios.)
Here are five of the stocks that passed the screen this week (10/26/12):
CMCSA Comcast Corporation
Comcast provides entertainment, information, and communication products and services in the United States and internationally. This stock has seen great performance over the last 12 months. It's also a decently profitable company, pays a nice dividend, has good growth prospects and is still relatively inexpensive compared to industry peers. Those are all reasons why the stock is rated highly by the Zacks Rank and Wall Street analysts. Comcast is also launching innovative products in the on-demand video streaming services.
TGT Target Corp.
Target Corporation operates general merchandise stores in the United States. This is another company that looks strong fundamentally: solid earnings growth, decent price valuation and highly rated by analysts. Target has also exceeded earnings expectations for at least the last seven quarters and has seen future earnings projections increase for the next fiscal year. This all adds up to a Zacks Rank Buy.
LYB LyondellBasell Industries NV
LyondellBassell, a Rotterdam, Holland-based company, manufactures and sells chemicals and polymers, refines crude oil, produces gasoline blending components, and develops and licenses technologies for the production of polymers. This stock has been on a tear, being up 71% YTD. Yet the stock is cheaper than its industry averages and the S&P 500. This company also pays a great dividend. Ten out of fourteen analysts rate this company a Strong Buy and due to recent increases in earnings estimates, it's also rated a Buy by the Zacks Rank.
PRU Prudential Financial, Inc.
Prudential, through its subsidiaries, provides various financial products and services, including life insurance, annuities, retirement-related services, mutual funds and investment management services in the Unites States, Asia, Europe and Latin America. A company's stock price usually moves in tandem with its earnings and, given improving earnings estimates, Prudential's stock price is expected to rise. The company is also relatively undervalued by most valuation measures.
MPC Marathon Petroleum Corporation
Marathon engages in refining, transporting and marketing petroleum products primarily in the United States. This company sees future earnings projections increasing by over 25% for the next few quarters. Eight out of nine Wall Street analysts rate Marathon as a Strong Buy and the other rates it as a Buy. The stock price is up 64% YTD, but current valuations remain low enough to indicate there's more room for the price to continue its increase.
Thoughtful Stock Picking
Maybe because it's outdoors and most epiphanies occur while doing something outside, but I think lawn work is the perfect time to reflect on the most pressing decisions in our lives. So try this. The next time you're out raking your yard, think about things that make some stocks better than others. Once inside, grab some paper, a pen and write down your ideas. Then pour yourself a cup of hot apple cider, head to your computer and use the Zacks Research Wizard to test your ideas.
Starting today, you are invited to do this free of charge. (We'll provide the software, you provide the hot beverage.) You'll have 14 days to create, tweak and backtest your strategies. At the same time, you can see the latest picks from pre-loaded winning strategies that average gains of up to 67.4% per year.
Learn more about your Research Wizard free trial >>
Let's make some money!
Kip Robbins is a Quantitative Analyst with Zacks.com. He analyzes screens and strategies for Zacks customers and for use in Zacks Research Wizard which empowers individual investors to use market-beating screens, build their own, and backtest their results.