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."
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.
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
BRUNSWICK CORP (BC): Free Stock Analysis Report
DELEK US HLDGS (DK): Free Stock Analysis Report
MANPOWER INC WI (MAN): Free Stock Analysis Report
VALMONT INDS (VMI): Free Stock Analysis Report
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