Martin Zweig's conservative approach to growth

WHAT ARE WE LOOKING FOR?

Our series continues on the Nasdaq Guru Screener ( http://www.nasdaq.com/reference/guru.stm), a free online stock-screening tool designed to generate lists of U.S. stocks that most closely fit the investing strategies of some of the most famous investing gurus in the United States. The tool is actually the brainchild of Validea.com, an investment newsletter website. Validea maintains model portfolios based on the guru screens - portfolios that have considerably outperformed the overall market since their inception in mid-2003.

Today, we turn our attention to the conservative-growth screen, based on the approach of fund manager Martin Zweig.

THE ZWEIG SCREEN

Mr. Zweig, a former university professor, gained widespread public fame in the 1980s, thanks to his 1986 best-seller Winning on Wall Street and his regular appearances on the long-running PBS program Wall Street Week. He also has the distinction of owning the most expensive apartment in Manhattan, a $70-million penthouse suite that occupies the top three storeys of the Pierre Hotel overlooking Central Park.

But despite such lavish trappings of his success, Mr. Zweig has built his reputation on a conservative approach to growth stocks - identifying companies with stable, long-term track records for superior earnings growth.

To start, stocks that have price-to-earnings ratios below five are eliminated from consideration (such a low P/E implies a weak growth story), as are stocks with P/Es of more than 43 or more than three times the market average (too much downside risk). Companies whose revenues are growing substantially slower than earnings are also screened out, as Mr. Zweig's approach seeks stocks that are actually growing their business, rather than improving profits via cost-cutting measures. In addition, quarter-to-quarter sales growth must be accelerating.

After that, the screen then focuses on several growth measures. In essence, these are all aimed at identifying companies whose quarterly earnings are positive and accelerating, and that show a continuation of a long-term trend of strong earnings growth. Mr. Zweig also favours stocks with low debt levels, since high debt can be an impediment to growth.

THE RESULTS

Validea.com's 20-stock Zweig Growth Investor portfolio (rebalanced monthly) has generated returns of 104.5 per cent since its July, 2003, inception. Over the same period, the S&P 500 has returned 33.9 per cent.

The top stock produced by Nasdaq.com's Zweig screener tool is Baldor Electric Co., an Arkansas-based manufacturer of industrial electric motors. The company's latest quarterly earnings were up 38 per cent from a year earlier, roughly in line with the 44-per-cent average growth pace in the prior three quarters. The company's earnings have grown in each of the past five years, with an average long-term growth rate of 26.5 per cent.

SOURCE: WWW.NASDAQ.COM

WHAT'S NEXT?

Tomorrow, we look at the Validea Momentum Strategy screen, based on Validea's own interpretation of the book How to Make Money in Stocks by Wall Street veteran William O'Neil, founder of the business newspaper Investor's Business Daily.