FEEL FREE TO PRINT THIS WEEKEND REPORT
Approach to Successful Stock Trading Combining Company
Fundamentals with Chart Technicals"
Comments or Questions (TSM Service, Methodology, Performance
or Your Success Stories)
TSM Fundamental Screens
On these pages I'll share the results of proprietary screens that I'm
constantly developing. The ideal screen would meet the following criteria:
- generate 20 percent plus annual compounded rate of return;
- experience a max drawdown of 20 percent over both bullish and bearish
- require minimal time management, i.e., perhaps weekly, biweekly or
Change in Zacks Ranking from >2 to 1 (11/01/15)
On 10/26/15 below (last Monday evening), I listed 15 TSM stocks that were
currently ranked 1 by Zacks but had been ranked a 3 or greater the week before.
This group would have had an earnings estimate event that caused its ranking to
make big positive jump.
The table shows the price improvement by the end of the week: Monday's closing
price, Max price reached after that, gain/loss, # shares bought with $5,000
($75,000 for group), # shares, total profit after
commissions. One stock, TILE, had a bad reaction to its earnings report, while
the other 14 generated profit opportunities ($2,187). In the future, I would not
use this strategy with those reporting earnings in the coming week (PRXL was
another, but it reacted better).
absolute max out of each position would be impossible, but this diverse
group could easily have generated a $1,000 profit over 4 days. The strategy
of trading TSM stocks (a group with quality fundamentals) that have had a
big jump in their Zacks ranking is a winner. A list meeting this criteria,
with their fundamentals, will be provided each evening in the daily TSM
past 6 years, this Zacks change grouping returned nearly twice that of the
S&P: an average of 11.6 stocks each week versus the 500. Over that period,
the annual compounded rates of return were 25.6 and 12.9%, respectively.
other factor, Price-to-Sales ratio < 0.75, and this return doubles.
Obviously, this strategy has
worked well over this 6-year period.
Earnings Revision, Price-to-Sales and Zacks
Rankings Change (8/10/15)
This screen was run over a recent 132 week period (for 2 week hold period but 1
week hold period produces similar results). It's meant to highlight a few
metrics that work in concert to drive stock price over the short term:
Rankings (1 & 2 are strong buys and buys) - 945 today
Upward Earnings Revisions in the current years annual estimate over
the past week (> 5%) - 208 today
Change resulting from the earnings improvement (3, 4 or 5 ranking 1 week
ago) - 229
(between 0.01 and 0.75) - 1286 today
Price > $5 with >
100,000 daily average volume - 3123 today
average, there will be two stocks that meet all of these criteria each week.
Over this period, 76.5% of these two-week trades were winners, and the
account grew at a 42.2% compounded annual rate. While I'm not suggesting
here that one buy these stocks blindly each week necessarily, I would look
for these criteria being met in each week's TSM listing and then take a good
look at their charts.
These fundamental criteria drive price over the
short term. The following stocks met the criteria for the coming week: ALDW,
CCRN, CDW, ORN, RAIL, REGI. Some will be TSM stocks (haven't identified this
week's list yet). The attached table shows their fundamentals.
Industry Performance, Los Price/Sales, Upward
Earnings Revisions and Technical Pullback
I've been working on a screen that incorporates the TSM principles:
1. Price > $10
2. Average Daily Volume > 150,000
3. Zacks Rank 1 or 2
4.Top 100 of 250 Industries as ranked by their component stock rankings
5. Price/Sales between 0.01 and 0.75
6. This Year's Earnings Estimate Increased > 5% over past 4 weeks
7. Price-wise, worst performing 4 stocks over past 4 weeks.
for stocks with quality fundamentals and value (Zacks Rank and P/S), that
have had a recent, substantial upwards earnings revision but have recently
pulled back or consolidated.
Over the past 78 weeks (year and a half) this screen has produced the
results shown in the chart trading a max of 4 stocks each week. It's overall
return was 89.7% compared to the S&P's 18.6%.
The portfolio did have one very good week with a single stock (week 50 up
26%), but even excluding that one, the portfolio would have been up 50.6%.
The May/June picks and returns are shown in the table, as are picks for next
Note, this screen uses the closing price Friday as the entry price Monday
morning and then sells at Friday's close.
I will be improving this screen over time. Results of this screen (or a
better one if I find it) will be presented in Sunday's TSM Daily Report.
Fundamentals Plus Pullback
The following chart shows the power of fundamentals in short-term stock trading.
The combination of Zacks ranking (1 or 2), low Price-to- Sales-Ratio (less than
0.5) coupled with at least a 3% increase in this year's earnings estimate over
the past week produced a 75.8% compounded annual return from 4/15/05 to present
(versus the S&P's 8%).
Fundamentals Plus Pullback
I recently ran a screen covering 9.9 years between 2001
and 2011 over periods of both strong and weak markets (even the extremely
weak 2008). The universe of stocks tested met these constraints:
- Zacks ranking =1 (highest earnings quality)
- Price-to-Sales ratio between 0.01 (good value) and
- 2 year PEG ratios between
0.01 and 1.25 (good value left in price)
- Price > $10
- Average 20 day
Over 516 weeks (starting in 08/01/01), from those stocks
meeting the above constraints, one screen bought the worst 4 stocks in terms
of price growth over the preceding week, while another bought the best 4.
The following chart shows how each performed utilizing a one week holding
period and contrasts each one's results against the S&P's return over the
same period. While the Zacks #1 stocks performed well, buying the
pullback was a far better strategy--yielding 5 times the return. Note,
very little escaped the 2008 market. A rule that allowed one to trade
only bullish markets, like the S&P must be above its 200-day moving average,
would have kept one out of the deep drawdowns.
Pullback Versus Breakout for Fundamentally Sound Stocks
This first one demonstrates the power of buying fundamentally sound stocks in pullback
rather than breakout
that it's hard to beat a stock with good fundamentals that's in pullback mode.
That's why I prefer to trade TSM's daily picks in pullback, even looking to enter
buying a position in further pullback rather than buying at breakout prices,
though I usually offer both entries for each daily TSM pick.
The following chart shows the performance of two investment strategies over
the a 479 week period (9.2 years from 12/17/99 to 2/13/09) through both bullish and
bearish times. Note, the S&P 500's performance is included as a benchmark
(and the y-axis is a log scale). Each strategy begins with $10,000 and has
its holdings updated each week. Over this period, the S&P's equity curve
dropped to $5,587 while the first strategy's equity curve rose to $2,096,347 and
the second one dropped to
$2,127. So what are these two strategies that differ so drastically in
Though I'll keep most of the requirements proprietary, both begin by requiring their stock membership have a Zacks ranking of 1 or
2 (the strong buys and buys); both require their respective picks to be in the top 50
terms of price performance over the past 24 weeks and then that group the top 50
percent price performance over the past 12 weeks. The two differ in their
fourth requirement: the strong performing strategy picks the worst 10
performers over the past week (those in pullback), and the weaker
performing strategy picks the top 10 performers over the past week (breakout and
strong momentum risers).
Each week 10 stocks were picked to meet the
above criteria. I think you'll agree, the huge performance difference is
both counterintuitive and its magnitude surprising.
The lessons to be learned from this screen:
- Buying fundamentally sound stocks in pullback is much preferred to
buying fundamentally sound stocks in breakout (both in good and bad times);
(my other studies have shown this is well)
- Historic price change is a good strategic element (though not clear here,
for short-term trades it's far better than fundamental criteria, like price-to-sales, P/E or PEG
- Even a great stock-picking strategy won't perform well in a bearish
market, as evidenced in the last year's flattening performance of the top curve
(all three strategies have 50 percent maximum drawdown over this period);
- Clearly, one needs to add market performance criteria that minimizes
risk in poor market conditions.
My next effort will be aimed at improving the drawdown characteristics. It
doesn't matter how great an annual return one gets, if it's susceptible to a 50
percent drawdown, it's not very tradable, i.e., it's tough to sleep at night and
trade the strategy.