I’m sure most everyone reading this knows that the Zacks Rank is probably the most effective rating system out there. Good markets or bad, stocks with a Zacks Rank of #1, continue to outperform.
In fact, since 1988, the average annual return of Zacks’ #1 Ranked stocks is up 31.8% a year.
But what I want to focus on today is how to try and recreate those returns in a practical trading account.
Since there are typically over 200+ stocks Ranked a #1 at any time, it’s important to know what other filters to apply to the Zacks Rank to generate a smaller (more tradable) watchlist.
Two filters in particular, when added to the Zacks Rank of #1, not only narrows down the number of qualified stocks to a practical portfolio size (approx. 10-12 stocks), it often times increases its performance as well.
The two filters I’m talking about are;
· % Change Q1 Est. over 4 Weeks > 0
(Positive current quarter estimate revisions over the last 4 weeks.)
· % Broker Rating Change over 1 Week > 0
(Positive avg. broker rating changes over the last week.)
And of course …
· Zacks Rank = 1
These two items added to the Zacks #1 Rank, produce powerful results!
I ran a series of separate tests on the Filtered Zacks Rank strategy, over each of the last 5 years (2002 thru 2006). I rebalanced the portfolio every four weeks and started each run on different start dates so each test would be rebalanced over a different set of four-week periods. (This is done to eliminate coincidence and verify robustness.)
In 2002, the Zacks #1 Rated stocks returned just over 1%, with an average portfolio size of approx. 200 stocks. An impressive return when compared to the S&P 500’s –22%. But holding onto 200 or so stocks isn’t doable for most investors. But when adding the two aforementioned filters, the portfolio size shrinks to a tradable 10 stocks (on average), and a phenomenal 18.1% average annualized return.
In 2003, the Zacks #1 list (approx. 200 stocks) did nearly 75% in comparison to the S&P 500’s almost 29%. But the filtered Zacks Rank narrowed that list down to only 10 stocks (on average) with a return of over 66%. (And while it’s true the filtered Zacks Rank produced a smaller return than the full Zacks Rank (66% vs. 75%), rebalancing only 10 stocks a month is far more manageable than 200.)
In 2004, the returns for the Zacks #1 Ranked stocks were up 28.8% with an average portfolio size of 202 stocks. (The S&P was up only 10.9%.) But the filtered Zacks #1’s annualized returns were up 30.3%, with again only 10 stocks to hold on average.
In 2005, the complete list of the Zacks #1 Ranked stocks showed an average annualized gross return of 31.7% with an average portfolio size of 208 stocks. The Filtered Zacks Rank was up 42.4%, but with an average portfolio size of only 10-12 stocks. (And while both of these numbers are impressive, 10-12 stocks is way easier to trade than 208!)
In 2006, the average annualized return for the Filtered Zacks Rank was up 34.3%, holding on average of only 8 stocks in your portfolio.
And so far in 2007, (YTD thru 4/20/07), the Filtered Zacks Rank’s avg. compounded gross return is already up 21% with an average of only 6-7 stocks held at a time.
I also ran these strategies using a one week holding period too with very impressive results. In fact, the Filtered Zacks Rank’s compounded gross return is up 35.3% so far this yr. with an avg. portfolio size of only 6 stocks.
Here’s the stocks that qualified the Filtered Zacks Rank for 5/1/07;
Industry & Company
%Ch. Curr. Qtr. Est. - 4 Wks.
% Ch. Rtg.
OTHER CONSUMER DISCRETIONARY
Arch Cap Gp Ltd
Xl Cap Ltd-A
Morgan St Dean
Manpower Inc Wi
Check it out for yourself. Get the list of the Filtered Zacks Rank stocks each week. And try incorporating this into your own stock picking strategies. And be sure to test it all out to see how it performs. Find out what works and what doesn’t. It can all be done with the Research Wizard stock picking and backtesting program. Sign up now for your two week free trial and learn how.
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.