Zweig Fundamental Analysis

Zweig used a shotgun approach to screening stocks, rather than investigating individual stocks in depth. 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 Sample Checklist of Fundamentals For a Martin Zweig Type Stock Purchase (modified for the JSE based on our previous research) appears below.

1. The company should have annual earnings growth of 20% or more for at least four years.
2. Sales growth should be similar to earnings growth.
3. The PE ratio should not be too low. Reject companies with a PE of two or less.
4. 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 interims results and items 6 and 7, leaving that up to you to perform after we have taken the grunt work out of preparing the screen.