ZWEIG : About | BackTests | Zweig Strategy Blog | Market Timing Strategy

Martin Zweig was born in 1942 in Cleveland, Ohio and invented the puts/call ratio, a well-known market indicator. Apart from becoming famous for accurately predicting at least two great market crashes he was the founder of "The Zweig Forecast" a top market advisory for the 15 year period between 1980 and 1995 that delivered a 16 percent per annum compounding return, the highest risk-adjusted return of any market advisory service during that time. Zweig was also a very successful investor in his own right and his methodologies have been well documented and written about. Zweig also published a very successful book, "Winning on Wall Street". You can learn more from http://www.martinzweig.org/

According to the AAII, out of more than 50 stock-screens it operates on a monthly basis, the Martin Zweig Stock Screen has been its top performer in the last ten years - up more than 1,900 percent between 1998 and 2008 (see below)




Zweig's investing philosophy is to buy and sell stocks in accordance with

  1. Broader market conditions (see "Market Timing Strategy"),
  2. The fundamentals of the stocks themselves and
  3. Entry/exit timing using price action strength.
It is not a traditional "buy and hold" strategy and he believed in being fully vested in bull markets and completely divested in bear markets (waiting with interest-earning cash to get back in later on with exceptional value).

This is the philosophy that PowerStocks have adopted, with our sole purpose to provide you with those tools to select deep-value stocks with the highest probability of market out-performance coupled with the largest margins of safety.

As we demonstrated with Piotroski, we will be performing the first ever public Zweig Fundamental Stock Screen for the JSE. Like Piotroski, it is a more active strategy than most of the annual buy-and-hold strategies we track, and therefore the Zweig Strategy Blog will have regular postings.

Zweig used a shotgun approach to screening stocks, rather than investigating individual stocks in depth - a classical mechanical investing methodology. Five out of the eight stocks (62.5%) that made it through his screens performed well. Zweig gives greatest weight to PE and earnings trend.

EARNINGS TRENDS
Before he will consider buying a stock, Zweig needs to see the company's earnings rising consistently for the last four or five years. He also needs to reassure himself that nothing has gone wrong recently, so he checks that the most recent quarterly earnings have shown growth compared to the same quarter a year ago. The upward earnings trend should be backed by a parallel sales trend. Zweig believes that earnings growth will not be sustainable if earnings are rising due to cost cutting rather than increased sales.

PRICE TO EARNINGS
Zweig is interested only in stocks whose PE ratio is not unusually high relative to the current market. He believes high PE stocks are risky. If they fail to deliver, even slightly, on the high expectations associated with their PE ratio, their prices can quickly plummet. Zweig rules out stocks whose PE is unusually low because it takes odd circumstances - usually there is something worryingly wrong with the company - to produce very low PE values.

Although some companies do prosper after achieving earnings growth through cost cutting and some stocks do rise appreciably after being marked down to very low PE ratios, Zweig is interested in probabilities. On average, companies that don't fit his criteria won't deliver the strongly rising share price he desires; therefore he avoids them.

ZWEIG CHECKLIST
A check-list of Fundamentals for the PowerStocks interpretation of a Martin Zweig Type Stock Purchase (modified for the JSE based on our  research) appears below:

  1. The company should have annual earnings growth of 20% or more for at least four years. 
  2. Earnings for the last interims should exceed earnings for the same period the previous year to ensure nothing has recently gone wrong
  3. Sales growth should be similar to earnings growth.
  4. The PE ratio should not be too low. Reject companies with a PE of two or less. The PE ratio should not be too high. Fast growing companies tend to have higher than average price/earnings ratios. Reduce the risk of overpaying for growth by rejecting any companies whose price/earnings ratios are more than 60 percent above average for their sector.
  5. Company debt should be average or below average for the sector the company operates in.
  6. Management should not have overestimated earnings during the last 3 years
  7. There should be no selling of stock by insiders. If more than one insider is selling, they should be selling fewer shares than other insiders are purchasing.
For our screening purposes we will be ignoring items 6 and 7, leaving that up to you to perform after we have taken the grunt work out of preparing the screen.
 
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