Earlier this week I read an article that suggested the moon's
effect on tides may have led to the disastrous sinking of the
Titanic. The theory is that the unusually close proximity of the
moon to the Earth at the time probably caused higher than expected
tides, which dislodged extraordinarily large icebergs. What struck
me about the article is that it mentioned that the captain of the
Titanic was assigned to this maiden voyage
precisely because
he was a highly experienced, knowledgeable and careful seaman of
the North Atlantic. I hadn't known that he was so credentialed.
What we all do know is that those unusually large icebergs made
their way much further South than expected, into the shipping
lanes.
So here is a situation where an experienced professional was
extremely comfortable operating in a certain environment and in a
certain manner. Yet the environment had changed beyond his
expectations and, because he was operating the ship the way he
would given past conditions, the captain was headed for disaster.
And we all know what happened as a result of his complacency.
What We Can Learn from Titanic
The lesson of the Titanic's captain could have similar
implications for your stock portfolio. Perhaps you're a seasoned
investor and have been selecting stocks the same way for 10, 20, or
even more years. If so, how do you truly know if your stock-picking
strategy still works? Have you been keeping perfect records to know
with confidence that your strategy outperforms, or are you simply
"remembering" that your stock picks have been profitable? (Numerous
behavioral studies have shown that people tend to remember their
successes and ignore their failures. We condition ourselves to
"believe" we're better at performing a task than we actually are.
Humans are an optimistic species. It's a trait that served us well
during our evolution, but it may not serve us so well in our
modern, complex world of investing.)
On the other hand, if you're new to stock investing, what kind
of ideas do you have that will lead to higher returns? Would you
like a way to test those ideas?
How To Look Deeper
Furthermore, how would you like to have access to numerous data
items like analyst ratings, target prices and corporate financial
statements for thousands of companies? After all, the more informed
you are; the better decision maker you'll be. Does the appeal to
test your ideas over many historical time periods, including up and
down markets and economic cycles, appeal to you? Would you like to
get a sense of the riskiness or volatility of your strategy? In
other words, wouldn't it be good to know the frequency and size of
the "icebergs" inherent in your strategy? Wouldn't you like to know
if momentum, value, or growth strategies (or combinations thereof)
perform better over time?
Zacks offers a tool that allows you to find answers to these
questions. You can use the Research Wizard to navigate all the
different data available, discover strategies that lead to higher
returns and test it all for confident trading. It truly is a
one-of-a-kind product, available to the individual investor. With
the Research Wizard, you're only limited by your imagination.
Let's look at an example. Sticking with the non-complacency
theme, I decided to not only look at stocks with the best Zacks
Rank, but those that most recently appeared as Zacks Rank #1s
(Strong Buys). So I'm avoiding complacency here by selecting the
freshest and best Zacks Ranks.
Testing a strategy of the stocks that just became a #1 within
the last week yielded a 10.8% annual average return--compared to a
0% annual average return for the S&P 500 from 2000-2011. So
$10,000 invested in this strategy at the end of 1999 would have
returned $34,062 at the end of 2011, versus $10,049 for the S&P
500. The strategy was, however, slightly more risky with the
largest losing period returning -32.5% compared to -27.5% for the
S&P 500. The number of stocks in the portfolio averaged just
above 30 over this 11-year timeframe, and portfolios with a smaller
number of stocks tend to be more volatile.
Here's how to find the stocks that just became Zacks Rank
#1s:
- 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 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.)
- Finally, select only those stocks with a Zacks Rank [1 week
ago] not equal to 1. (You want the previous week's Zacks Rank
to NOT be a 1.)
Here are five stocks using the above methodology (3/16/12):
KR – The Kroger Company
Kroger, a Cincinnati-based company, operates as a retailer in
the US, and manufactures and processes food for sale in its
supermarkets. This company has become a new Zacks #1 Rank of a
"Strong Buy". The improvement in the Zacks Rank is due to several
quarters of earnings surprises and recent upward revisions in both
quarterly and fiscal earnings estimates.
ICE – IntercontinentalExchange, Inc.
IntercontinentalExchange, an Atlanta-based company, operates
regulated exchanges, clearing houses, and over-the-counter (OTC)
markets for agricultural, credit, currency, emissions, energy and
equity index contracts. This new Zacks #1 Rank has a solid history
of earnings surprises and just had four estimate revisions in the
last seven days, and five in the last 30 days for both its current
fiscal quarter and annual earnings.
HLF – Herbalife Ltd.
Over the last year, this company has had super strong earnings
surprises of at least 15%. Couple those surprises with at least
eight revisions for both the current quarterly and annual earnings
estimates over the last 30 days, and you have what adds up to a
Zacks #1 Rank. Herbalife, a network marketing company, sells weight
management, nutritional supplement, energy, sports and fitness, and
personal care products worldwide.
WLK – Westlake Chemical Corp.
Westlake manufactures and markets basic chemicals, vinyls,
polymers and fabricated products. This company has delivered a
positive earnings surprise six out of the last seven quarters and
had at least two quarterly and annual estimate revisions within the
last 30 days. Earnings surprises and upward earnings revisions lead
to a good Zacks Rank.
CPRT – Copart, Inc.
Copart provides online auctions and vehicle remarketing services
in the United States, Canada and the United Kingdom. This Zacks #1
Rank's latest earnings report beat expectations by over 20%, which
has caused upward estimate revisions within the last week and month
for both quarterly and annual earnings.
Do Your Own Research
Because I'm a strong proponent of self-improvement, I encourage
you to verify your strategies and try to improve upon them with the
Zacks Research Wizard. Starting today, you are invited to do
this 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.
Don't be complacent with your current strategy. Avoid unseen
disasters in your portfolio by becoming a better stock picker
today.
Learn more about your Research Wizard free trial
>>
Good 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.
COPART INC (CPRT): Free Stock Analysis Report
HERBALIFE LTD (HLF): Free Stock Analysis Report
INTERCONTINENTL (ICE): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
WESTLAKE CHEM (WLK): Free Stock Analysis Report
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