Martin Zweig Picks a Pair of Winners

Salvaging Profits
The first of these is Copart. Founded in 1982, Copart processes and sells salvage vehicles primarily to licensed dismantlers, rebuilders and used-vehicle dealers. These are vehicles obtained from insurance companies which have been damaged and deemed a total loss by the insurance company, or recovered stolen vehicles for which an insurance settlement has already been made.

The Zweig strategy looks for a stock with a price-to-earnings ratio that is between 5 (meaning a P/E of 5) and three times the current market P/E (which is 19). This provides a range of 5 to 57, and Copart's is nearly in the middle at 25.66.

Another important issue is that the rate of quarterly sales growth be rising. To evaluate this, the change from this quarter last year to the present quarter (which was 12.2%) is compared with the previous quarter last year compared with the previous quarter of the current year (which was -2.6%). Sales growth for the prior must be greater than the latter, and this is true for Copart.

The next steps involve looking at earnings from various angles. These include current quarterly earnings having to be positive, quarterly earnings one year ago having to be positive, the current quarter being greater than the year-ago quarter, and earnings growing for the past several quarters. Copart passes all of these tests.

In addition, EPS must have increased in each of the past five years, which is true for Copart. One final earnings test is that the long-term earnings growth rate must be at least 15% per year. Copart's long-term growth rate, based on the average of the three-, four- and five-year historical EPS growth rates, is 20.42%.

One last variable worth mentioning is that the company should not have a high level of debt. Copart has no long-term debt, which is great.

Insuring Future Gains
The second Zweig-strategy-approved stock is RLI, which started in 1961 as a company that insured for contact-lens replacements, and has since expanded into what the company calls "a specialty insurance company" that sells property and casualty policies and surety bonds aimed at niche or underserved markets.

RLI's P/E of 6.86 fits into the Zweig range. In terms of earnings, RLI's EPS is positive, the quarter a year ago was positive, the current EPS is greater than the year-ago earnings, and earnings have been increasing for the past several quarters.

Further, EPS growth for the current quarter is greater than the historical growth rate, earnings have increased in each of the past five years, and long-term EPS growth is a strong 27.91%, based on the average of the three-, four- and five-year historical EPS growth rates. We don't look at debt, because this is a financial company.

Both of these companies are strong performers. They are making money and have reasonably priced stocks. And, of course, they have the approval of the Zweig strategy. These are two stocks worthy of your portfolio
ByJohn Reese, RealMoney.com Contributor