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WHAT ARE WE LOOKING FOR?

This week, the focus is on the Nasdaq Guru Screener ( http://www.nasdaq.com/reference/guru.stm), a free online tool that allows investors to screen for U.S.-listed stocks that best match the investing strategies of some of the best-known investing writers and commentators of the past 50 years. The screening tool was developed five years ago by investment newsletter website Validea.com, which maintains model portfolios based on the screens - portfolios that have considerably outperformed the overall market.

Today, we check out the stocks currently being generated by the Conservative Growth Screen - patterned after the approach of money manager, newsletter writer and former media personality Martin Zweig.

ZWEIG THE CONSERVATIVE

Mr. Zweig rose to prominence in the 1980s, thanks to his 1986 best-seller Winning on Wall Street and his regular appearances on the PBS program Wall Street Week (where, famously, he predicted the 1987 stock market crash). Though he has stepped away from the public limelight in recent years, he does retain one lavish claim to fame - the most expensive apartment in Manhattan, a $70-million (U.S.) penthouse suite in the Pierre Hotel overlooking Central Park.

Despite the fancy digs, Mr. Zweig is hardly an impulse buyer when it comes to the market. He has long preached a conservative approach, identifying companies with stable, long-term track records for superior earnings growth. These are the kinds of stocks that typically outperform in slumping markets, as investors seek out quality and stability.

In this screen, the starting point is the price-to-earnings ratio. All stocks that have P/Es below five are eliminated from consideration (it implies a weak growth story). So are stocks with P/Es of more than 43 or more than three times the market average, whichever is lower (too much downside risk).

The screen also eliminates companies whose revenues are growing substantially slower than earnings. That's because Mr. Zweig wants companies that are actually growing their business, rather than improving profits via cost-cutting. In addition, quarter-to-quarter sales growth must be accelerating.

After clearing those hurdles, the screen seeks companies whose quarterly earnings are positive and accelerating, and that show a long-term trend of strong earnings growth. Mr. Zweig also favours stocks with low debt, since high debt can be an impediment to growth.

THE RESULTS

Validea.com's 20-stock Conservative Growth model portfolio has generated total returns of 98 per cent since its inception five years ago, compared with just 27 per cent for the S&P 500. But somewhat surprisingly, it is down 11.9 per cent for the year to date - only slightly better than the 13.3-per-cent drop in the S&P 500.

It would appear the market hasn't yet been paying much of a premium for earnings-growth quality during the current downturn in the U.S. earnings cycle. An opportunity, perhaps?

The one Canadian name that pops up on the Zweig screen is high-flier Research In Motion Ltd., despite its bloated P/E of 43. Normally, that would be just barely within the screen's P/E criteria, but with the S&P 500's trailing 12-month P/E hovering around 20, RIM comfortably qualifies. Its solid track record for earnings growth solidifies its place on this list.

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Nasdaq Guru Screener - Martin Zweig - Conservative Growth Investor

Guru US$ US$-mil
quant Price Market Relative
Ticker Company name score July 7 cap strength P/E PEG
HOMB-Q Home BancShares Inc. 100% 21.54 395 79 17 0.6
PSE-N Pioneer Sthwst En. Part. 97% 20.58 618 87 9 0.1
HIMX-Q Himax Technologies Inc. 92% 5.25 1,002 78 8 0.4
BCPC-Q Balchem Corp. 92% 25.12 455 93 27 1.2
FAST-Q Fastenal Co. 92% 43.82 6,534 84 27 1.0
HEI-N Heico Corp. 92% 30.73 811 53 19 0.9
BJRI-Q BJ's Restaurants Inc. 92% 8.98 237 24 18 0.7
GFIG-Q GFI Group Inc. 92% 8.15 958 23 9 0.2
GHL-N Greenhill & Co., Inc. 92% 48.09 1,300 51 11 0.4
RIMM-Q Research in Motion Ltd. 92% 115.66 65,290 96 43 0.4
SSYS-Q Stratasys Inc. 92% 19.41 400 66 28 1.3
VIP-N Vimpel Communications 92% 26.87 27,287 90 15 0.3
NYX-N NYSE Euronext 92% 46.24 12,254 41 15 0.2
FUQI-Q Fuqi International Inc. 92% 8.59 180 69 9 0.1
STRA-Q Strayer Education Inc. 92% 208.56 2,965 96 44 2.3
PBT-N Permian Basin Royalty Tr 92% 23.22 1,082 96 14 0.7
CZFS-Q Citizens Financial Svc. Inc. 92% 22.60 64 86 9 1.1
CBKM-Q Consumers Bancorp Inc. 89% 12.30 25 91 17 n/a
CAC-Q Camden National Corp. 89% 24.20 186 40 8 1.1
FLIC-Q First of Long Island Corp. 89% 19.50 141 78 13 6.8

SOURCE: WWW.NASDAQ.COM

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