Martin Zweig was a legendary investor, money manager, and financial analyst. From a young age, Zweig was fascinated by the stock market. By the time he was in college, he was buying and selling stocks. As a graduate student, he performed groundbreaking research and discovered the put/call ratio, which compares the trading volume of bullish call options to bearish put options and provides insight into market sentiment.
Zweig managed money for several decades and his stock recommendation newsletter, the Zweig Forecast, was ranked #1 for risk-adjusted returns during the 15 years it was tracked. Zweig also authored the book Winning on Wall Street. He was known for his exhaustive, earnings-focused approach to stock selection as well as his market timing skills using a variety of economic and sentiment indicators.
Validea’s Zweig-Inspired Stock Selection Model
Validea’s Zweig-based “Growth Investor” strategy is based on the fundamental stock selection criteria outlined in Zweig’s book. It looks for growth stocks with strong earnings, but with a conservative streak. Here are the key criteria:
- P/E Ratio: The P/E must be greater than 5 but less than 3 times the current market P/E.
- Sales and Earnings Growth: Earnings growth must be driven by strong sales growth, not one-time cost cutting. Quarterly sales growth must be accelerating.
- Earnings Trends: Earnings must be positive and increasing, both in the most recent quarter and over the past few quarters. The model looks at growth persistence and acceleration from a variety of angles.
- Long-Term Growth: EPS growth should be at least 15-20% per year.
- Debt: Debt/Equity must be low compared to industry average.
- Earnings Surprises: Earnings growth for current quarter must exceed expectations.
- Insider Buying: Insider buying is a positive, while heavy insider selling is a negative.
The Zweig model combines these growth criteria with some conservative rules to limit risk. For example, P/E ratios above a certain threshold are avoided. This focus on high quality growth stocks with a margin of safety is a hallmark of Zweig’s approach.
Stocks Passing Validea’s Zweig Screen
Here are some examples of stocks that currently pass the rigorous tests of Validea’s Zweig-inspired strategy:
Dlocal operates a payments platform that connects global merchants to emerging market consumers across Africa, Asia, Latin America, and the Middle East. The Uruguay-based company has posted very strong growth in recent years. It has a P/E of 29 and EPS growth over the past 3-5 years averaging over 50%. Sales have also increased more than 68% per year and the company has very low debt. DLO scores a perfect 100% rating from our Zweig model.
Axos Financial is the holding company for Axos Bank, a nationwide digital consumer bank. The firm has grown earnings at a 24.7% rate over the long term and sales have increased over 20% per year as well. Quarterly earnings growth has also been very strong and has been accelerating. AX has a P/E of just 7.8, which the Zweig model considers very attractive given the company’s growth. The stock earns a 92% score from the Zweig model.
Oddity Tech is an Israel-based company that creates and sells beauty and wellness products using technology such as machine learning and computer vision to personalize offerings for customers. ODD has grown earnings more than 37% annually over the past 3 years and at similar rate over the past 5 years. Revenue growth has been even stronger at over 80%. The firm also has no long-term debt. ODD gets a 92% score from our Zweig model.
Kinsale Capital Group Inc (KNSL)
Kinsale Capital is a property & casualty insurance company focused on the excess and surplus (E&S) market, which provides coverage for unique or hard-to-place risks. KNSL has grown earnings at a 52.5% rate over the past 3-5 years, driven by 40% annual sales growth. The firm has a P/E of 34, reasonable given its growth, and its debt/equity of 3.8% is well below the industry average of 27%. The Zweig model gives KNSL a 100% score.
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