This week, I bumped into a friend who remembered my article
based on seasonal investing in which I suggested to buy around
Halloween and sell in May. He reminded me that May is soon
approaching, and asked me whether I still felt that way. After I
published the article in the Fall, I purchased one of the stocks
I'd recommended. Its price is up a modest 1% since then, has a 3.6%
dividend yield, and lately I've been reading a lot of positive
prose about the stock, so I'm a little uncertain if it's really
time to sell.
My friend also asked me what I was going to write about next and
I mentioned I sort of feel like my Muse is quiet. Suggesting I
write about something from my core, he reminded me of the line from
Shakespeare's King Lear: "Speak what we feel, not what we
ought to say."
What's Next?
So you might expect me to now say that this time is different.
However, I don't feel that way. I get the feeling the stock market
is going to limp along this summer then pick up again around
Election Day. However, even though the market as a whole might
tread water, there will be stocks noticeably outperforming others
and bucking the sideways trend. It's time for a longer-term
perspective and buying now would enable you to lock-in a low
purchase price. Because of this, I'm going use the Research Wizard
to show you how to pick stocks to hold for at least 6-12
months.
How to Look for Long-Term Winners
This is perfect timing because for the past couple of months,
I've been conducting research on which indicators or
characteristics of a stock, or a company's financials are
correlated to future stock returns. Some of that work has had a
short-term focus while some has had a long-term focus. The
long-term analysis is complete and I have identified a few
profitable metrics. There's a peppering of Value, Momentum and
Growth in these ideas including
Earnings-Before-Interest-Taxes-Depreciation-and-Amortization
(EBITDA) to Enterprise Value (EV), 1- and 12-Week Price Changes,
Zacks Rank and 1-Year Earnings Growth. What's great about these is
that they offer a nice set of diverse factors and are complementary
to one another.
I conducted tests on each of these five variables from 2001-2011
wherein I measured the average six month returns for the stocks in
the top 10% of each variable. So let's take a peek at the
results.
After running these individual tests, I compiled a composite
model using each of these factors in combination, and tested them
over a longer timeframe from 2000-2011. The results of the
combination showed a 14.1% average annual compounded return versus
0% for the S&P 500. That’s 14.1% on average for each year,
which results in a total compounded return of 385%. That means
$10,000 invested in the S&P at the start of 2000 would have
delivered $10,000 at the end of 2011, while this strategy would
have produced over $48,500 on the same investment.
Due to the diverse factor set, the strategy was also less risky
compared to the S&P 500. The maximum drawdown for the strategy
was -37.3% compared to -40.4 for the S&P 500. Also, the average
losing period was -13.5% for this strategy, compared to the S&P
500’s -17.0%. These results are all the more surprising because the
strategy only held at most 10 stocks in the portfolio, compared to
the 500 in the S&P 500.
Here's how to find good stocks for the long run:
- First, start with only US common stocks.
- Next, 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).
- Select only those stocks with a current Zacks Rank equal to
1. (You want current high-ranking stocks.)
- Select 60 stocks with the highest EBITDA/EV ratio. (You
want high earnings compared to Enterprise Value.)
- Next, pick the 30 stocks with the highest 12 week price
change. (You want stocks with solid price momentum over the
last 12 weeks.)
- Then, choose the 15 stocks with the lowest 1 week price
change. (Research shows it's best to buy stocks on a recent
pull back.)
- Finally, select the 10 stocks with the highest 1Q change in
4Q EPS. (You should be looking for good earnings growth
too.)
Here are five stocks using the above methodology (4/13/12):
MAN – ManpowerGroup
Manpower, a Milwaukee-based company, provides workforce
solutions and services worldwide. This company is a #1 Zacks Rank,
the stock is up 22% over the last 3 months, and it’s experiencing
good earnings growth. The stock is also a great value based on a
19% EBITDA/EV ratio and is ripe to buy based on the recent
pull-back.
VMI – Valmont Industries, Inc.
Valmont, an Omaha-based company, produces and sells fabricated
metal products, pole and tower structures, and mechanized
irrigation systems in the United States and internationally. This
Zacks Rank #1 has had good performance over the past 12 weeks,
increasing earnings over the last year, and remains a good
value.
BC – Brunswick Corporation
Brunswick is more than just bowling. The company designs,
manufactures, and markets marine engines, boats, fitness equipment,
billiards and other tabletop games. The stock of this company is up
28% over the past 12 weeks, earnings growth is up over threefold,
and it is a Zacks Rank #1. To top it all off, the stock is a good
value as well.
DK – Delek US Holdings Inc.
Out of these five choices, Delek has had the highest earnings
growth and has the best EBITDA/EV ratio of 38% which means this
company is a perfect Growth-at-Reasonable-Price play. Since the
stock’s price has climbed 25% recently, it seems the market is
starting to catch on. This company is also a Zacks Rank #1 and
that’s always a good sign. Delek, an integrated energy company,
engages in refining, marketing, supplying, and retailing petroleum
products.
ATU – Actuant Corporation
Actuant designs, manufactures, and distributes hydraulic and
mechanical tools and electrical products worldwide. This stock has
everything we’re looking for: a Zacks Rank #1, a good EBITDA/EV,
good price performance over the past 12 weeks with a recent
pull-back, and good earnings growth.
Find More Long-Term Stocks
So do you feel like you need a longer term approach in this
current market environment? Would you like to explore your own
ideas and thoughts about what makes a great stock? I’m confident
you’ll discover a strategy that conforms to your style of investing
with the Zacks Research Wizard.
Starting today, you are invited to use it free of charge. 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.
Search your feelings and see if you have what it takes to be a
better stock picker. I bet you do. You just need a tool that
facilitates and cultivates your ideas.
Learn more about your Research Wizard free trial
>>
Happy Investing,
Kip
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 back test their
results.
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:
http://www.zacks.com/performance.
ACTUANT CORP (ATU): Free Stock Analysis Report
ACTUANT CORP (ATU): Free Stock Analysis Report
BRUNSWICK CORP (BC): Free Stock Analysis Report
BRUNSWICK CORP (BC): Free Stock Analysis Report
DELEK US HLDGS (DK): Free Stock Analysis Report
DELEK US HLDGS (DK): Free Stock Analysis Report
MANPOWER INC WI (MAN): Free Stock Analysis Report
MANPOWER INC WI (MAN): Free Stock Analysis Report
VALMONT INDS (VMI): Free Stock Analysis Report
VALMONT INDS (VMI): Free Stock Analysis Report
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