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Wednesday, 12/19/2007 1:39:36 PM

Wednesday, December 19, 2007 1:39:36 PM

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zacks.com picks STAN-> Zacks Commentary: Screen Of The Week PRINTABLE VERSION
Returning to Square One
By Kevin Matras
Dec 18, 2007

For this week's article, I'm starting at square one and going over the importance of screening in your investment decisions. But even more essential, I'm going to explain why backtesting is the most important step of all.

Why Should I Use a Stock Screener?

The short answer is:

“Because there’s over 10,000 stocks out there and you need a way to find the good ones”.

The longer answer is:

Other than buying the stocks that are talked about in the media or among friends, how else are you going to find stocks that meet certain fundamental characteristics?

Most people do their own `screening' one way or another. They may hear that a stock has a certain Growth Rate, or a certain P/E Ratio or Sales Surprise, for example. They then research stocks that meet this criteria.

Well if you want to find stocks that meet certain criteria, you can find them quickly and easily with a stock screener.

But, just because you narrow down 10,000 stocks to only a handful, doesn't necessarily mean that you've picked the best stocks on the planet.

In fact, you might have picked the worst ones.

But how will you know?

Backtesting!

Once you've created a screen, you can backtest and see how the screening strategy performed.

In other words, does your screen generally find stocks that go up once they've been identified? Or does your screen generally find stocks that get buried?

This is good stuff to know.

With backtesting, you can see how successful your stock- picking strategy has performed in the past, so you'll have a better idea as to what your probability of success will be now and in the future.

Of course, past performance is no guarantee of future results, but what else do you have to go by?

Think about it; if you saw that a stock-picking strategy did nothing but lose money, year after year, there's NO WAY you'd want to trade that strategy or use that screen.

Why?

Because it's `proven' that it picks bad stocks.

Sure, it may turn around and start picking winners, but it may also continue to pick losers as it always has.

On the other hand;

... what if you saw a strategy that did great year after year? You'd of course want to trade that strategy because it's proven to be profitable.

And while it may start picking losers all of a sudden, it may also continue to pick winning stocks, just like it had been doing over and over before.

Keep in mind, a screening and backtesting program isn't a `box of magic'.

But it's a great way to see what works and what doesn't BEFORE you put your money at risk!

Don't get me wrong, just because you have a great strategy for picking winning stocks, it isn't going to preclude you from ever having another loser. On the contrary, even some of the best strategies `only' have win ratios of 70% or 80%. (NOT 100%.)

But if your strategy picks winners far more often than losers, you can feel confident that your next pick will have a high probability of success.

And don't be the guy who `accidentally' gets into one or two good stocks and thinks he's the next Warren Buffett. If your stock account is important to you, test your stock-picking strategies out to see if your method for finding winners is a repeatable one.

And that's why someone should use a Screener and a Backtester.

As usual, I’ll close with a few new picks from some of my favorite backtested screening strategies for the week of 12/18/07:

CHP C&D Tech, Inc.
(from the Big Money screen)

GTI Graftech, International
(from the Filtered Zacks Rank2 screen)

STAN Standard Parking Corp.
(from the Upgrades and Revisions2 and ROE2 screen)

Sign up now for your two-week free trial to the Research Wizard and take your stock screening to another level. And when you’re done, backtest it to see if it works! And don’t forget to check out the winning trading strategies that come loaded with the program. Know when to buy and when sell. It’s all there.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.


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All posts are strictly my opinion and are not buy or sell recommendations.


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