There are very few investment strategies that have stood up againt the test of time, with wave after wave of the hottest new fund managers crashing and burning when market conditions evolve.
But fortunately for the Zacks investment community, we have two realtively simple yet powerful tools at our disposal to help us find stocks with the best chance to outperform over the long haul.
The Zacks Rank
The first is the Zacks Rank, which uses fluctuations in earnings estimates to assign a ranking from 1 to 5 to a universe of more than 4000 stocks. Of this group, only 5%, or roughly 250 stocks, can be assigned a coveted #1 rank, designated as a “Strong Buy.”
And as you can see, the numbers speak for themselves, with a portfolio of Zacks #1 rank stocks generating an average annual return of 28% since 1988. Clearly, this is a system that holds up against the test of time, producing outsized results in the most rambunctious bulls and sleepiest bears.
Let’s Add a Valuation Filter
But in order to find the best of the best, I decided to slap another time-tested filter onto these #1 stocks, a key valuation metric. The P/E ratio is relatively simple in nature, and it’s certainly no secret on the Street, but it does have a very strong correlation with stocks that tend to produce outsized gains over the long haul.
So when you put the two together, a Zacks #1 rank stock with a P/E multiple that is well below its peers, you have a very powerful one-two combination that focuses on the sweet-spot of the market; growth and value.
On that note, let’s go ahead and take a look at some Zacks #1 Rank stocks that have P/E multiples well below their peers.
4 Zacks #1 Rank Stocks With Value
Ford Motor Co. (F) has been on quite a roll lately, rebounding from less than $1 in march of 2009 to a recent high at $14.57. As you might guess, estimates have been advancing in tandem, with the current year up a sizeable 33 cents in the last three months to $1.33. The next-year estimate looks good too, pegged at $1.59, a bullish 19% growth projection. Finally, with a forward P/E of just 8X, this stock trades at a deep discount to its peers average of 26X. Take a look at the chart below.
Frontline Ltd. (FRO) is a shipping company that has also seen some big gains over the last year. As a Zacks #1 rank stock, estimates have been very bullish here too, with the current year up $1.01 in the last three months to $3.11. The next-year estimate of $3.39 is up 72 cents in the same time, a solid 9% growth projection. Frontline’s forward P/E of 11X is well below its peers 16X. Take a look at the chart below.
Dominos Pizza, Inc. (DPZ) has been a big story over the last few months as its fresh, new pizza recipe continues to grab the attention of its customers and investors alike. The estimate picture has been pretty solid, with the current year up 11 cents in the last two months to $1.23. The next-year estimate is pegged at $1.33, another 9% growth projection to go along with a compelling P/E of 10X against its peers 16.5X. Take a look at the chart below.
Brasil Telecom S.A. (BTM) is the only international stock on the list, providing telecom services in Brazil. This hasn’t been much of a high flyer this year as the Brazilian stock market has pulled back on higher interest rates, but that has only made the valuation picture sweeter, as estimates have continued to rise. With a forward P/E of 5X, this stock trades at a steep discount to its peers avrage of 13X. Take a look below.
Sometimes the best things in life are also the most simple. And as you can see here, by relying on these two time-tested strategies that are both easy to understand and easy to use, you can give your portfolio a very nice boost and a chance to out perform the averages over the long haul.
