In the dozen-plus years I've spent studying investment strategies, one thing I've found is that most of history's most successful approaches -- including methods used by such legends as Benjamin Graham, Warren Buffett, and David Dreman -- target value stocks.
But that doesn’t mean all of the market's most successful gurus were cemented on the value side of the growth/value pendulum. Take Martin Zweig, who used a growth-focused methodology to post one of the best long-term track records I've come across. His Zweig Forecast investment newsletter ranked number one for risk-adjusted returns during the 15 years that Hulbert Financial Digest monitored it, producing an impressive 15.9% annualized return during that time. Zweig Dimenna Partners, a multibillion-dollar New York-based firm that Zweig co-founded, has also been ranked in the top 15 on Barron’s list of the most successful hedge funds.
Zweig's approach is the basis for one of my "Guru Strategies" (computer models that are each based on the approach of a different investing great). I wrote about this strategy back in August, and since then all three of the Zweig-inspired picks I mentioned have gained between 15%-25%, easily outpacing the broader market. Since its July 2003 inception, a 10-stock portfolio picked using the approach has gained 64.0%, or 7.0% per year, while the S&P 500 has gained just 19.9%, or 2.5% per year
(Currently, access to this top growth strategy (and several of my other Guru Strategies) is available through the Guru Analysis & Guru Stock Screener App in Seeking Alpha's Investing App Store.)
How did Zweig do it? Well, while he is known for spending his cash on some flashy, fun items -- he has owned a $70 million penthouse that Forbes once reported was the most expensive apartment in New York City -- Zweig's approach is a disciplined, methodical one. He put a company through the wringer in assessing its earnings, making sure that earnings were not only growing but doing so at an accelerating rate -- and that the growth was coming from the right sources. Among the criteria my Zweig-inspired model, which is based on Zweig's book Winning on Wall Street, uses:
- Trend of Earnings: Earnings should be higher in the most recent quarter than they were a year ago in the same quarter.
- Earnings Persistence: Earnings per share should have increased in each year of the past five-year period; EPS should also have grown in each of the past four quarters (vs. the respective year-ago quarters).
- Long-Term Growth: EPS should be growing by at least 15%over the long term; a growth rate over 30% is exceptional.
- Earnings Acceleration: EPS growth for the most recent quarter (versus the same quarter last year) should be greater than the average growth for the previous three quarters (versus the respective three year-ago quarters). EPS growth in the most recent quarter also should be greater than the long-term growth rate. These criteria made sure that Zweig wasn’t getting in late on a stock that had great long-term growth numbers, but which was coming to the end of its growth run.
While Zweig’s EPS focus certainly classifies him as a growth investor, his approach is by no means a growth-at-all-costs strategy. He made sure that a stock’s price/earnings ratio was no greater than three times the market average, and never greater than 43 regardless of what the market average was. (He also didn’t like stocks with P/Es less than 5, because that could be a sign of a firm that was simply a dog.)
Zweig wrote that for earnings growth to be sustainable over the long haul, it has to be driven by sales -- not cost-cutting measures. This approach thus looks for companies that are posting strong, accelerating sales growth. And, Zweig also wanted to make sure a firm’s growth wasn’t driven by unsustainable amounts of leverage. Realizing that different industries require different debt loads, he looked for stocks whose debt/equity ratios were lower than their industry average.
You should be aware that Zweig also put a good amount of emphasis on technical factors to adjust how much of his portfolio he put into stocks, looking at things like interest rates and installment debt levels. But those rules are tough for an individual investor to put into practice, and, over the years, I’ve found that using only the quantitative, fundamental-based criteria Zweig outlined in his book can produce very strong results. Here are a handful of stocks my Zweig-based model is high on right now.
Apple Inc. (NASDAQ:AAPL): The tech giant ($290 billion market cap) gets a perfect 100% score from my Zweig-based approach. It has upped EPS at a 58.2% rate over the long term (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term figure), and an even-better 67.5% rate in the most recent quarter. The Zweig approach also likes that Apple has been increasing sales at a 36.6% rate over the long term (I use an average of the three-, four-, and five-year sales growth figures to get a long-term rate), and that sales growth has been accelerating -- it jumped to 66.7% last quarter. Plus, Apple has no long-term debt.
Cognizant Technology Solutions Corporation (NASDAQ:CTSH): This $19-billion-market-cap New Jersey-based I/T firm also gets a 100% score from the Zweig model, thanks in part to its 34.4% long-term EPS growth rate, and its even-better 46.7% growth rate in the most recent quarter. Like Apple, the company has no long-term debt and solid revenue growth -- 37.2% over the long term, and an even-better 42.6% last quarter.
Jos. A. Bank Clothiers (NASDAQ:JOSB): Bank ($1.2 billion market cap) gets a 97% score from my Zweig approach, which likes its solid 19.6% long-term EPS growth rate. That growth accelerated to an average of 22.2% in the three quarters before last quarter, and then jumped again to 31.1% last quarter. Maryland-based Bank also has no long-term debt, and its sales have been increasing at an accelerating rate (12.3% last quarter versus 10.0% in the quarter before that).
Catalyst Health Solutions (NASDAQ:CHSI): Another Maryland-based company, this $2-billion-market-cap pharmacy benefits manager gets a 92% score from my Zweig-inspired model. It likes the firm's 23.1% EPS growth rate last quarter, which was up slightly from an average of 22.8% in the three previous quarters. The strategy also likes that Catalyst's sales have been growing at a very strong 38.3% over the long term.
Lululemon Athletica Inc. (NASDAQ:LULU): This Vancouver-based firm ($3.4 billion market cap) makes athletic clothing, focusing on apparel for yoga, running, and dancing. It gets a 92% score from the Zweig approach, thanks to its impressive growth story. The company has grown EPS at a 120.8% rate over the long haul (using an average of the three- and four-year EPS growth rates, since the five-year rate is not available), and did even better last quarter, upping EPS by more than 130%. The firm also has no long-term debt, and it's been growing sales at a 49.5% rate over the long term.
Disclosure: Author long AAPL, CTSH, JOSB, CHSI, and LULU