The Matras Increasing Earnings Approach
by Charles Rotblut, CFA
Kevin Matras, a vice president with Zacks Investment Research and author of “Finding #1 Stocks: Screening, Backtesting and Time-Proven Strategies” (John Wiley & Sons, 2011), is a big advocate of stock screens. He strongly believes that a stock screen is necessary for finding good stocks.
Matras is an active trader, preferring to turn his portfolio over quickly rather than engage in long-term positions. This comes from his preference for stocks showing a potential to move upward in price over the short term. Though he does look at charts, Matras relies heavily on the concept of earnings momentum to find what he considers to be good stocks. This may include past earnings growth, recent upward revisions to earnings estimates or a combination of the two.
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Many of Matras’ strategies are presented in his book. A large number of these screens are based on the proprietary Zacks Rank indicator, which looks at changes to earnings estimates and earnings surprises (see the sidebar on page 32 for more information). Some of them are not, including the screen featured in this article, Increasing Earnings.
Earnings Momentum
Matras emphasizes a positive trend in earnings because, as he puts it, “In good markets or bad, strong earnings are one of the most important things that influence stock prices.” He considers rising earnings to be a key factor that separates great stocks from merely good ones. His Increasing Earnings screen applies this concept by looking for six consecutive quarters of rising earnings and the expectation that earnings will rise for at least an additional two quarters.
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Discussion
Not very worthwhile without being aboe to translate to criteria screenable with SIPro and 2. that has been backtested to see if the "bright idea" holds up.
posted about 1 year ago by Geoffrey from California
Since the "Est. Rev: Up 5%" screen is the best long term performer among AAII stock screens, it is good to see this additional screen. Thanks also for including the SiPro criteria; certainly makes it easier to set up and track real time in SiPro. I do agree with the previous poster; it would be great to see backtested results for this screen.
posted about 1 year ago by Charles from Maryland
I also agree that this article is basically useless without backtest results.
posted about 1 year ago by Laurence from New York
finally, the backtest results should incorporate survivorship bias. For this kind of screens which look at earnings growths in the past years, not accounting for survivorship bias can significantly influence the outcome of the backtest.
posted about 1 year ago by BGPL from California
Forgive the ignorance of a new investor who is trying to learn the best practice rules of investing. Can someone explain in lay terms what you mean by backtesting the results and how does one go about backtesting results?
Thanks for contributing to my learning process.
posted about 1 year ago by Joesph from Pennsylvania
Joseph--
Backtesting looks to see how a screening strategy performed in the past. A portfolio is created out of stocks that passed the screen at some point in the past (e.g., five years ago) and is then updated with all passing stocks at a specified interval, such as monthly or quarterly. The goal is to see how a portfolio created from the stocks identified by the screen during a past period in time performed. The danger is that the screen may have found some anomaly that no longer exists. This is why it is more important to ask whether the criteria used in the screen makes sense than simply looking for good backtested results. - Charles Rotblut
posted about 1 year ago by Charles Rotblut from Illinois
I am new to SIPro. Can I import this screen directly in SIPro to see which stocks pass the screen?
posted about 1 year ago by Ashok from New Jersey
Ashok--You will need to create the screen yourself in SIPro. You can do this by clicking on the "Tools" menu near the top of the program and then "Screen Editor". From there you just build the screen using the criteria listed in the article. -Charles Rotblut
posted about 1 year ago by Charles Rotblut from Illinois
When I look up DMD on Stock Investor PRO, I find that it has had negative earnings of at least minus $2 per share every year since 2006. The numbers have been becoming less negative but is that what you call earnings growth?
posted about 1 year ago by Richard from California
Google a blog called stockpunk. THe individual who runs that blog has done a lot of real world trading using Matras' approach, both the one reviewed here and others.
Most of his screening and backtesting is from a Zachs product called Research Wizard, which has been reviewed by AAII CI. However stockpunk (love that name) and others found many issues with the backtesting data and could not even come close to replicating the results in the real world.
Not to say this isn't a good screen, but when you look at the backtesting results from Research Wizard you may be tempted to think you will be a zillionaire in a couple of years. As with all things if it sounds too good to be true then it probably is.
posted about 1 year ago by Rob from North Carolina
Like all screens, it provides a place to start an assessment. A gem might be mined, but I am sure there will be tons of slag.
posted about 1 year ago by Paul from California
The following comments are why it is vitally important to not only buy a stock based on fundamentals but also technicals. DMD (a recent IPO in January) is experiencing an earnings turaround but the stock remains mired in a steep downtrend with extremely poor relative strength. It MAY become a buy tehnically eventually but at the moment I would not touch it; there are many other great opportunities available. Peace!
>>When I look up DMD on Stock Investor PRO, I find that it has had negative earnings of at least minus $2 per share every year since 2006. The numbers have been becoming less negative but is that what you call earnings growth?
posted 18 days ago by Richard from California<<<
posted about 1 year ago by Charles from Maryland
I am really glad to see the AAII Journal Stock Screens articles now containing the input data for SiPro. I never noticed it before but if it is new, it is a welcome addition. Peace!
posted about 1 year ago by Charles from Maryland
I am relatively new to creating a stock screen. I am currently attempting to create the Matras Increasing Earnings Screen. However I fail to see where in the "Field " criteria there is a match for "EPS-Diluted Continuing Q1" or any of the others. Can anyone enlighten me.
posted about 1 year ago by Monte from New York
Monte - In Stock Investor Pro, "EPS-Diluted Continuing Q1" can be found under the Income Statement - Quarterly Field. - Charles Rotblut
posted about 1 year ago by Charles from Illinois
