Martin Zweig was a renowned investment advisor, fund manager, and financial analyst who rose to prominence in the 1970s and 1980s. He was best known for his uncanny ability to predict major market turns and for developing a systematic, disciplined approach to growth stock investing.
In 1986, Zweig published his seminal book “Winning on Wall Street,” which detailed his investment philosophy and stock-picking methodology. The book became a bestseller and cemented Zweig’s reputation as one of the sharpest minds in finance.
As a money manager, Zweig achieved stellar returns. His Zweig Fund, launched in 1986, was one of the top-performing mutual funds of the late 1980s and early 1990s. Zweig’s disciplined, numbers-driven approach allowed him to identify high-quality growth stocks while avoiding the pitfalls that often plague growth investors.
Key Principles of Zweig’s Strategy
At its core, Zweig’s investment philosophy aimed to find companies with strong, consistent earnings growth that were still reasonably priced. He looked for stocks with:
- Persistent earnings growth at a moderate to high rate
- Earnings growth supported by revenue growth, not just cost-cutting
- Accelerating earnings
- Reasonable valuations relative to growth rates
- Insider buying and low debt
Zweig was also a strong believer in the importance of overall market trends. He developed sophisticated models to analyze market breadth, monetary conditions, and investor sentiment to help guide his investment decisions.
Validea’s Martin Zweig-inspired Model
Validea’s quantitative model based on Zweig’s approach seeks to identify stocks that exhibit the key characteristics Zweig looked for in his investments. Here are the main criteria:
1. Reasonable P/E Ratio
Zweig wanted growth at a reasonable price. The model requires a stock’s P/E ratio to be greater than 5 (to exclude extremely depressed stocks) but no more than 3 times the current market P/E. Additionally, the P/E should never exceed 43, regardless of market conditions.
2. Revenue Growth Supporting Earnings Growth
To ensure earnings growth is sustainable, the model requires revenue growth to be approximately in line with earnings growth. This helps eliminate companies boosting EPS through financial engineering or extreme cost-cutting.
3. Earnings Growth Persistence and Acceleration
The model looks for persistent earnings growth over multiple years, as well as accelerating growth in recent quarters. Specifically:
- Positive EPS growth from quarter to quarter, year over year
- Long-term EPS growth rate (using 3, 4, and 5-year averages) of at least 15% per year
- Current quarter EPS growth higher than the 3-quarter average growth rate
4. Positive Earnings Surprises
Zweig believed positive earnings surprises could be a catalyst for stock price appreciation. The model favors companies that have beaten earnings estimates in recent quarters.
5. Low Debt
Zweig preferred companies with strong balance sheets. The model requires a company’s debt-to-equity ratio to be lower than the industry average.
6. Insider Buying
Insider buying was seen as a positive sign by Zweig. The model looks for more insider buys than sells in recent months.
Stocks Currently Scoring Highly on Validea’s Zweig Model
Here are four stocks that currently score highly based on Validea’s interpretation of Martin Zweig’s strategy:
1. Deckers Outdoor Corp (DECK)
Deckers Outdoor is a footwear designer and distributor best known for its UGG and Hoka brands. The company scores a 92% on Validea’s Zweig-inspired model.
Key factors contributing to DECK’s high score:
- Strong earnings growth: 30.9% long-term EPS growth rate
- Accelerating earnings: Latest quarter EPS growth (86.8%) higher than 3-quarter average (51.4%)
- Revenue growth supporting earnings: 18% sales growth vs. 30.9% EPS growth
- Low debt: 0% debt-to-equity ratio vs. 56% industry average
The only minor blemish is that revenue growth (18%) is somewhat lower than earnings growth (30.9%), but not significantly enough to fail the criterion.
Hamilton Lane is an investment management firm specializing in private markets. It scores 92% on the Zweig model.
Highlights for HLNE include:
- Consistent earnings growth: EPS has increased each year for the past 5 years
- Accelerating growth: Latest quarter EPS growth (81.5%) much higher than 3-quarter average (37.6%)
- Strong long-term growth: 18.8% average annual EPS growth rate
- Low debt: 0% debt-to-equity ratio
The company narrowly misses a perfect score due to a slight earnings dip in one year, but its overall growth trajectory remains strong.
Oddity Tech is an Israel-based technology company operating in the beauty and wellness sector. It scores 92% on Validea’s Zweig-inspired model.
Key strengths for ODD include:
- Impressive earnings growth: 36% long-term EPS growth rate
- Accelerating earnings: Latest quarter EPS growth (37.7%) higher than long-term average
- Persistent growth: EPS has increased each year for 5 years straight
- Zero debt: 0% debt-to-equity ratio
The company’s only weakness in the model is slightly decelerating quarterly sales growth, but its overall growth profile remains very strong.
Amalgamated Bank is a mission-driven financial institution serving labor unions, nonprofits, and socially responsible businesses. It scores 92% on the Zweig model.
AMAL’s strengths include:
- Solid earnings growth: 21.2% long-term EPS growth rate
- Accelerating growth: Latest quarter EPS growth (24.3%) higher than 3-quarter average (5.8%)
- Revenue growth supporting earnings: 19.3% sales growth vs. 21.2% EPS growth
- Reasonable valuation: P/E of 9.2, well below market average
As a bank, AMAL’s debt-to-equity ratio isn’t evaluated in the same way as non-financial companies, but its overall financial position appears strong.
The Enduring Relevance of Zweig’s Approach
Martin Zweig’s investment philosophy, with its focus on consistent earnings growth, reasonable valuations, and strong financial health, remains highly relevant in today’s market. The stocks highlighted above demonstrate that companies exhibiting these characteristics can be found across various sectors and market capitalizations.
Investors using a Zweig-inspired approach should keep in mind that it’s primarily geared toward identifying high-quality growth stocks. While the strategy includes some valuation criteria, it’s not as heavily focused on value as some other investment approaches. Additionally, Zweig himself emphasized the importance of overall market trends, which are not fully captured in a stock-specific model.
Nonetheless, Zweig’s disciplined, quantitative approach to growth investing has stood the test of time. By focusing on companies with strong, accelerating earnings growth supported by solid fundamentals, investors can potentially identify promising growth stocks while avoiding many of the pitfalls associated with chasing momentum.
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