Zacks.com Featured Expert Kevin Matras Highlights: Bunge, CF Industries and Cummins

Business Wire,  May 14, 2008  

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CHICAGO -- Kevin Matras shows how to pick the best industries with the Zacks Rank. Stocks in this week's article are Bunge Ltd. (NYSE: BG), CF Industries Holdings, Inc. (NYSE: CF) and Cummins Inc. (NYSE: CMI). Click here for the full story exclusively on Zacks.com: http://at.zacks.com/?id=109

Screen of the Week written by Kevin Matras of Zacks Investment Research:

This week, I want to talk about how to use the Zacks Rank to identify the best Industries.

As you know, the Zacks Rank is one of the best ways to find stocks that outperform. And since an Industry is nothing more that a group of stocks in the same business - finding those groups with the best average Zacks Rank will help pinpoint stocks that should outperform.

This screen adds a unique tie-breaking element as well.

Parameters

Screening for the Best Industries based on the Zacks Rank is actually quite easy.

You would set it up in the Calculation Expression feature and it would look like this:

GrAgg117A(1*i192)

Then you choose the Operator: BotXIndA# 3

That means we're looking for the X Industries (Expanded Industries) with the Best Average Zacks Rank. By saying "Bottom 3", we're looking for only the Best Three Industries. (Since a Zacks #1 Rank is better than a Zacks #5 Rank, we use the 'Bottom' operator since the number 1 is smaller that the number 5.)

The Best Three X Industries this week (week of 5/12/08) were:

<  <  <      <

1)

Agricultural Operations -- Average Zacks Rank of 1.80
<  <  <      <

2)

Fertilizers -- Average Zacks Rank of 1.86
<  <  <      <

3)

Engines/Internal Combustion -- Average Zacks Rank of 2.00

(Feel free to expand your search to the best 5 or 10 or however many industries you choose.)

Next, it's time to narrow down those Industries to find the best stocks within them. Here is where the unique tie-breaker comes in.

If I ask for the best two stocks in each Industry based on the Zacks Rank, there may be many stocks that have a Zacks #1 Rank. Since the Zacks Rank is an integer (whole number), you'll need a way to break a potential tie.

One way to do this is to multiply the Zacks Rank with another item such as the Price to Sales Ratio or the P/E ratio. Since I'm looking for the best (i.e. the smallest Zacks Rank), I'll multiply it by a number where the smaller it is the better.

So I multiply the Zacks Rank of 1 by a P/E ratio - the stock with a 1 and the lower P/E ratio will be chosen. Why? Because 1 X 18 = 18 whereas 1 X 32.6 = 32.6. The Zacks Rank with the smaller multiplier will be selected. This works equally well with other items too. As I mentioned earlier - Price to Sales, Price to Book etc.

But since you're looking for a small number - don't multiply the Zacks Rank by a growth rate, for example, or an item where the bigger number is better. Why? Because a Zacks #1 Rank multiplied by a growth rate of 100% is bigger than a Zacks #1 Rank multiplied by a growth rate of 25%. So the result will be 100 vs. 25. But this will result in you getting the Zacks #1 Rank with the lower growth rate - probably not what you intended.

So multiply it by an item where the lower number is considered best.

The Zacks Rank multiplied the P/E ratio would look like this in the Calculation Expression feature:

i192 * i76

Then you would select the operator: Bot#InXInd 2

Again - the bottom number in this example would be the best.

Here is one stock from each of the Best Three Industries:

1)  <
Agricultural Operations -- Average Zacks Rank of 1.80



    <
Best Stock: BG (Bunge Ltd.) -- value of 14.54



    <




2)  <
Fertilizers -- Average Zacks Rank of 1.86



    <
Best stock: CF (CF Industries Holdings, Inc.) -- value of 17.11



    <




3)  <
Engines/Internal Combustion -- Average Zacks Rank of 2.00



    <
Best stock: CMI (Cummins Inc.) -- value of 34.39

Note: when the Zacks Rank is 1, the best stock will be decided by which multiplier is the lowest. But if you're comparing Zacks #1 Ranks and Zacks #2 Ranks for example: if the Zacks #1 Rank has a higher enough multiplier than the Zacks #2 Rank, you may find that the Zacks #2 Rank gets picked instead.

Try experimenting with different multipliers on your own and see which works best for you. And don't forget to backtest it to make sure it works!

Many screeners won't let you screen for the Top Sectors or Industries. And even fewer will let you combine items together to make your own. But in the Research Wizard you can.

Sign up for your two-week FREE trial to the Research Wizard today. Remember the key to successful screening is in discovering those screens that have produced profitable results in the past. And that's exactly what you get with the powerful Screening and Backtesting ability of Research Wizard. Try it today for free: http://at.zacks.com/?id=111

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.