This screen uses the 'Return on Equity' (ROE) measure as one of the main components in this strategy.
ROE is one of the quickest ways to gauge whether a company is creating assets or gobbling up investors' cash.
ROE = income / common equity
For instance; if the ROE is 10%, then ten cents of assets are created for each $1 of shareholder equity in a given year.
Knowing the company is generating assets on invested capital rather than burning thru it is a great starting point.
• ROE greater than or equal to 10
The median ROE value for all of the stocks in the Zacks Universe is under 10. So any company with shareholder equity less than this benchmark is disqualified.
• Zacks Rank equal to 1
The Zacks Rank (which is considered by many to be the best rating system out there), looks at upward earnings estimates revisions (amongst other things), and will get us into companies whose forecasted earnings are getting stronger.
• % (Broker) Rating Strong Buy equal to 100(%)
Since broker ratings are typically skewed wildly to 'buy' and 'strong buy', I decided to cancel out any company where the brokers aren't fully on board.
• Price/Sales Ratio less than or equal to 1
A low price to sales ratio (1 and below for example), is usually thought to be of better value, since the investor is paying less for each unit of sales.
• Price greater than or equal to 5
And for good measure, all of the stocks have to be trading at a minimum of $5 or higher. Most money managers won't touch anything under $5.
Over the last 16 years, the ROE 2 strategy, using a one-week holding period, showed an average annual return of 38.6%.
And it's already up 19.2% this year vs. the S&P's 3.6%.
Return on Equity is a great item to use regardless of what kind of investor you are.
I particularly like to look for increasing ROE. That provides another clue that management is doing something right and that they have costs under control.
If their ROE is falling, that can alert you to potential problems.
Trading the Strategy
All stocks are purchased with an equal dollar amount. At the end of the holding/rebalancing period (1 week), the screen is run again, keeping the stocks that remain qualified, selling the stocks that no longer qualify, and buying the new stocks that newly qualify.
This strategy comes loaded with the Research Wizard and is called bt_sow_roe2. It can be found in the SoW (Screen of the Week) folder.
Here are three of the five stocks that qualified for the ROE 2 strategy:
(BAK - Free Report) Braskem
(HQCL - Free Report) Hanwha Q CELLS
(LXFR - Free Report) Luxfer Holdings
Get the rest of the stocks on this list and start trading the ROE 2 (or any of our other strategies) in your own account. Remember, the key to successful screening is in discovering those screens that have produced profitable results in the past. That's exactly what you get with the Research Wizard stock picking and backtesting program.
Click here for your 2 week free trial to the Research Wizard >>
Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks portfolios and strategies are available at: https://www.zacks.com/performance.