About two decades ago, I began to study the stock market seriously, and quickly realized if I tried to create my own investment strategy, all I would be doing is reinventing the proverbial wheel. Others before me had studied the market and created some very effective strategies. I figured I would do well just to follow their recommendations.
Since I automated the strategies of about a dozen Wall Street gurus in 2003, I have closely monitored how well they have performed. One of the best of breed is my strategy based on the thinking of Martin Zweig. Zweig, who died in 2013, emphasized the price-to-earnings ratio (as do many investors), but he put a floor under what is acceptable.
He ignored any stock whose P/E is below 5:1, because a lower P/E ratio usually indicates a weak company. He also put limits on how high a P/E he would accept. A stock's P/E must not be more than 3x the current market average (which is 17) or no more than 43, which ever is lower.
Earnings per share were also important to him. He wanted these to be increasing at an accelerating rate, to be sure the stock's growth was not slowing down. He also believed that earnings growth, if it is to continue over the long term, must be propelled by sales growth, which is why he liked to see sales growing at a faster pace than earnings.
Since I started following my Zweig-based strategy in July 2003, it has produced an annual return of 10.2%, which is about 60% better than the S&P 500's performance of 6.4% during the same time period. This track record is proof that Zweig's strategy works.
One company currently earning high grades from my Zweig strategy is Cognizant Technology Solutions (CTSH), a global information technology and business process services firm. Its P/E is a perfectly acceptable 20.29, revenue growth is outpacing earnings growth (which generally is good) and growth in earnings has been accelerating. In addition, the company has no debt.
Paychex (PAYX) is a company rendering services such as payroll processing, human resources and benefits outsourcing to small- to medium sized businesses. Its P/E is 25.8, revenue growth is higher than earnings growth, earnings growth is accelerating and the company has no debt.
A third Zweig favorite is LKQ Corp. (LKQ), which produces replacement parts, components and systems used to repair cars and trucks. In addition to the U.S., it operates in the United Kingdom, France, Canada, Mexico, Central America and elsewhere. LKQ's P/E is 23.26, revenue is growing faster than earnings and earnings growth is accelerating. Unlike the previous two companies, LKQ has a relatively high level of debt.
These are strong companies that have earned the respect of my Zweig strategy. They are definitely worth your attention.
