The Zen Earnings Leverage Trading Strategy looks for companies that have high scores on fundamental as well as technical metrics. The idea is to bet on recent winners, rather than betting on companies that have been struggling lately.
The Screening Algorithm
This factor trading strategy begins with a universe of 6,000 stocks of all sizes, industries, and geographical locations, the algorithm selects stocks with robust fundamental characteristics like revenue and earnings growth, debt coverage, growing market share.
It then applies a second filter that only allows companies that have positive technical readings like price and volume momentum, positive on-balance volume, and high relative strength. We run the screening algorithm every four weeks, and it produces a list of 10-15 candidates for further consideration. We then look at each candidate and eliminate any that have unrealistically high numbers, or are the subject of rumors about accounting irregularities or contract cancellations.
The final list of stocks that make it into the model portfolio consists of 5-7 thoroughly vetted names. These finalists tend to be stocks that are showing both earnings and price momentum, but have not yet become overvalued.
The Performance History
The performance of the Earnings Leverage Factor Trading Strategy is impressive. Over the 21 years beginning in 2000, this strategy has beaten the market 18 times. 2011 was the first time that the strategy underperformed the market.
This illustrates an important feature of this strategy. There will always be periods when it under-performs the market. It’s an inevitable fact of life, unless you were a client of Bernie Madoff, and never experienced a down year until you lost everything.