Book Review: Finding #1 Stocks

by: Brenda Jubin

The credo of Zacks Investment Research, that “earnings estimate revisions are the most powerful force impacting stock prices,” dates to a 1979 paper by Leonard Zacks, co-founder of the firm. From that insight came the Zacks Rank, available by subscription. The Zacks Research Wizard, another subscription product, further parses the search for winning stocks.

Finding #1 Stocks: Screening, Backtesting, and Time-Proven Strategies (Wiley, 2011) by Kevin Matras, a Zacks vice president, presents screening ideas and trading strategies, all created and tested with the Research Wizard. For the dyed-in-the-wool DIYer, this book can point the way. For most folks who want to follow the Zacks path, it’s a lot easier to let the company’s computers/researchers do the heavy lifting. So consider this book a not-so-subtle variation on the infomercial theme. (I really have to come up with a good word for a book with a sales pitch. Perhaps I’m just behind in marketing lingo and the word is firmly in place, but I welcome all suggestions, especially those that make me laugh.)

What kinds of parameters go into screens for winning stocks? Let’s look at a single screen: all-cap aggressive growth. Here are the inputs: no market-cap restriction, Zacks rank #1, price >= $5, average dollar trading volume >= $1,000,000, estimated one-year EPS growth >= 1.20 * the industry median, but estimated one-year EPS growth <= 50%, P/E using F(1) estimates <= industry median, PEG ratio <= industry median, price to sales ratio <= industry median, and price to sales ratio = bottom #7. Note the number of “value” components in this set of parameters for an aggressive growth screen.

Using a one-week holding period (and not including commissions), over the last ten years “this strategy showed an average annual return of 51.6% for a total compounded return of 6,401.3%. … With a two-week holding period, the average compounded annual growth rate came in at 38.9% for an average total compounded return of 2,734.1%.” (pp. 62-63)

Matras takes the reader through a series of stock screens representing a range of styles that have produced outsized returns. He then introduces technical analysis, explains chart patterns, and shows how to use the Zacks Research Wizard for screening and backtesting. He rounds out the book with chapters on short selling, managing risk, options, and ETFs. And, of course, at the end are links for free trials of Zacks products.

The book is nicely put together and is full of excellent screening ideas. As books touting a product go, this one is first-rate. I have never tried the Zacks Research Wizard, so I can’t pass judgment on it. But I’d give a qualified buy rating to Finding #1 Stocks.