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First-Quarter 2026 Earnings Have Been Good

Earnings have been a driver of this spring’s market rally. Corporations are reporting profit growth, and analysts have been upwardly revising their second-quarter and full-year 2026 earnings forecasts. First Trust Portfolios’ Robert Carey and Peter Leonteos shared this takeaway: “The S&P 500 index’s trailing 12-month price return of 30.6% [through May 8, 2026] nearly matches its [first-quarter 2026] year-over-year earnings growth rate of 27.7% as of the same date.”

The energy sector has influenced the upwardly revised full-year 2026 earnings estimates for the S&P 500, but it is not the only one. Analysts have also become more optimistic about the outlook for information technology and communication services companies. On the other hand, earnings growth expectations have fallen for the healthcare sector, per LSEG I/B/E/S.

Source: LSEG I/B/E/S. Data as of 5/15/2026.

Talk About Pushing Your Chips In

Nvidia Corp.’s (NVDA) run toward a $6 trillion market capitalization has played a role in helping the S&P 500 reach new highs, but it is not alone. Many other semiconductor stocks have also computed big gains lately. I plotted State Street SPDR S&P Semiconductor ETF (XSD) against iShares Core S&P 500 ETF (IVV). The semiconductor ETF tracks a modified equal-weighted index, which keeps Nvidia from having outsized influence on its performance. It is up significantly since the end of March.

Source: AAII.com. Data from QuoteMedia as of 5/20/2026.

Inflation Expectations Are Rising

Incoming Federal Reserve chairman Kevin Warsh is not walking into an ideal inflation environment. On Tuesday, May 19, the five-year breakeven inflation rate was 2.66% —its highest level in three years. The 10-year breakeven rate is also rising. Both reflect the inflation expectations that traders are pricing into bonds. Blame the ongoing oil shock caused by the closing of the Strait of Hormuz.

Will There Be an Interest Rate Hike Later This Year?

Given what’s happening in the bond market, at the gas pump and even with tomato prices (up 39% over the last year!), I revisited the CME FedWatch Tool. Traders are currently pricing in an approximately 60% chance of interest rates being raised by the end of this year. These odds could change significantly based on what does and does not happen with the Iran war.

Source: CME Group.

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Traditional Business Forces Apply to AI Too

OpenAI, the company behind ChatGPT, is preparing to file for an initial public offering (IPO) “in the coming days or weeks,” according to The Wall Street Journal. The company will be questioned about whether it can maintain its current market share as it makes pitches to potential investors. Competitor Anthropic (the company behind Claude) has been gaining market share. Alphabet Inc.’s (GOOGL) Google Gemini has made inroads too.

The chart below from The Leuthold Group is a reminder that the still-young AI market is not immune from the traditional business forces of competition. The early entrants in technological innovation aren’t always the long-term winners.

More on AAII.com

• How to Analyze Corporate Earnings in Five Steps
  Earnings reports provide a snapshot of business performance, but they are most valuable when viewed as part of a longer-term trend.

• Incorporating Equal-Weighted Funds Into Your Allocation
  Equal-weighted funds hold the same securities as similar market-cap-weighted funds but in different proportions, reducing stock-specific risk.

• Navigating the Rise of Prediction Markets
  Participating in prediction markets should be regarded as speculative due to their binary outcomes, novel nature, evolving regulation, relatively high costs and low liquidity, as discussed in the May 2026 AAII Journal.

AAII Sentiment Survey

Optimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, neutral sentiment and pessimism increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 7.6 percentage points to 31.7%. Bullish sentiment is below its historical average of 37.5% for the first time in five weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 0.6 percentage points to 24.7%. Neutral sentiment is below its historical average of 31.5% for the 96th time in 98 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 7.0 percentage points to 43.6%. Bearish sentiment is unusually high and is above its historical average of 31.0% for the 15th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 14.6 percentage points to –11.9%. The bull-bear spread is unusually low and is below its historical average of 6.5% for the 14th time in 15 weeks.

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This week’s special question asked AAII members how they would describe the earnings guidance given by companies during first-quarter 2026 earnings season.

Here is how they responded:

• Better than I expected: 51.9%

• Approximately what I expected: 27.6%

• Worse than I expected: 2.8%

• Not sure/no opinion: 17.7%

This week’s Sentiment Survey results:

Bullish: 31.7%, down 7.6 points
Neutral: 24.7%, up 0.6 points
Bearish: 43.6%, up 7.0 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

AAII Asset Allocation Survey

Individual investors’ allocations to cash increased while stock and bond allocations decreased in the April AAII Asset Allocation Survey.

Stock and stock fund allocations decreased 0.7 percentage points to 68.5%. Stock and stock fund allocations are above their historical average of 61.5% for the 71st consecutive month.

Bond and bond fund allocations decreased 0.2 percentage points to 15.6%. Bond and bond fund allocations are below their historical average of 16.0% for the sixth time in seven months.

Cash allocations increased by 0.9 percentage points to 15.9%. Cash allocations are below their historical average of 22.5% for the 41st consecutive month.

April AAII Asset Allocation Survey results:

• Stocks and Stock Funds: 68.5%, down 0.7 percentage points

• Bonds and Bond Funds: 15.6%, down 0.2 percentage points

• Cash: 15.9%, up 0.9 percentage points

April AAII Asset Allocation Details:

• Stocks: 29.5%, up 0.1 percentage points

• Stocks Funds: 39.0%, down 0.7 percentage points

• Bonds: 4.6%, down 0.5 percentage points

• Bond Funds: 11.0%, up 0.3 percentage points

Historical averages:

• Stocks/Stock Funds: 61.5%

• Bonds/Bond Funds: 16.0%

• Cash: 22.5%

Take the Asset Allocation Survey.

This week, we cover the stock-picking strategy of Warren Buffett and give you a list of stocks that currently pass our screen based on Robert Hagstrom’s extensive writings about Buffett’s approach. Possibly no other investor today is as strongly associated with the basic principles of fundamental investing as Buffett.

AAII has adapted Hagstrom’s research into a screen that returns 30 companies based on several fundamental and financial strength metrics. The screen finds companies with a history of strong returns to shareholders, positive gross operating income and positive free cash flow. As of April 30, 2026, AAII’s Buffett Hagstrom screen has an annualized gain of 13.8% since inception in 1998, compared to the S&P 500 index’s return of 7.4% over the same period.

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Developing a Buffett Approach

While some critics feel that Buffett’s strategy cannot be duplicated, Hagstrom disagrees. He has authored several popular books that highlight Buffett’s core investing principles. In “The Essential Buffett: Timeless Principles for the New Economy” (Wiley, 2007), Hagstrom argues that it is possible to duplicate Buffett’s approach within your personal area of expertise. He presents the strategy through an accessible series of questions that should be explored with any potential investment. The approach demands that you:

• Analyze a stock as a business,

• Demand a margin of safety for each purchase,

• Manage a focused portfolio, and

• Protect yourself from the speculative and emotional forces of the market.

Buffett feels that speculators are primarily concerned with a company’s stock price, while investors first focus on how the business is doing. Buffett is a firm believer that knowledge helps to increase investment returns and reduce risk.

It is also important to keep one’s emotions in check. We should not let our emotions override our good judgment. Every person must take their own psychology into account. Some losses are inevitable when it comes to investing, so if you cannot emotionally handle the volatility, then you should consider a more conservative investing style.

12 Buffett Principles

Hagstrom identifies 12 basic Buffett principles that a company should possess to be considered for purchase. Not all of Buffett’s purchases display all these tenets, but as a group, the principles help to establish a reasonable approach to selecting stocks. The tenets cover both qualitative and quantitative business elements. These are used to create the Buffett Hagstrom screen.

Business Tenets

1. Is the business simple and understandable?

Knowledge helps to increase investment return and decrease risk. Buffett warns that if you buy a company for superficial reasons, then there is a tendency to dump the stock at the first sign of weakness. Investors need to be able to understand company factors such as cash flow, labor issues, pricing flexibility, capital needs, revenue growth and cost control.

2. Does the business have a consistent operating history?

Buffett avoids companies that are either solving difficult business problems or fundamentally changing their direction because previous plans were unsuccessful. Turnarounds rarely succeed in their turn. Buffett feels that the best returns come from companies that have been producing the same product or service for years.

While this tenet is primarily a qualitative element, the screen looks for positive operating profit over each of the last seven years as a basic test for consistent performance.

3. Does the business have favorable long-term prospects?

Buffett feels that the economic world is divided into a small group of “franchise” companies and a large group of commodity businesses. Companies with a franchise model produce a good or service that is needed or desired or has no close substitute, and they are companies that are not strongly regulated. Companies should have a strong, sustainable business advantage that protects sales and profits from competitors. Franchises have pricing flexibility to raise prices without the fear of losing market share or unit volume. Strong franchises have the strength to survive a major mistake.

It is important for the company to have a sustainable corporate advantage that acts as a barrier to make it difficult for others to compete. While this is a qualitative screen, many of the financial tenets—notably, measures of return on equity (ROE)—help to identify franchise companies.

Members are looking for your input. Can you help with this question from the Stock Screening & Analysis Community?

In your experience, which of Warren Buffett’s principles have worked best in helping you identify strong businesses with long-term value potential?

Click here and then choose the Join Community button on the right to answer this question or read their responses.

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Management Tenets

4. Is management rational?

When considering a company, Buffett evaluates managers for their rationality, candor and independent thinking, among other characteristics.

Buffett looks for companies whose managers behave like business owners and act in a rational way, especially in the treatment of retained earnings and the investment of company profits. Hagstrom feels that the most important action of management is the allocation of a firm’s capital. Effective use and reinvestment of a company’s cash flow ultimately determines the growth of a firm and its long-term value. This issue becomes critical as a company matures and starts to generate excess cash flow that cannot be reinvested in the primary business line at a high rate of return.

A company with excess cash flow and below-average investment rates of return can ignore the problem, try to buy growth or return the cash to its shareholders. While Buffett has used these cash flows to acquire strong companies, he favors companies that use excess cash to repurchase shares. The share repurchases help to shore up the stock price through rising demand and increase the proportional claim toward income for the remaining shares. It is difficult to buy growth, as many companies pay too much for their acquisitions and run into difficulty integrating and managing the new business.

5. Is management candid with its shareholders?

Buffett holds in high regard managers who fully disclose company performance, equally reporting mistakes and successes. Buffett respects managers who report information beyond that required with generally accepted accounting principles (GAAP). Buffett looks for financial reports that enable the financially literate investor to determine the approximate value of a business, determine the likelihood that a firm can meet its financial obligations and gain an understanding of how well the managers are running the business.

6. Does management resist the institutional imperative?

Buffett looks for companies run by managers willing to think independently. Most managers follow the “institutional imperative” to imitate the behavior of other managers because they are afraid to stand out and look foolish. Hagstrom isolates three factors that strongly influence management’s behavior:

• Most managers cannot control their desire for activity, which leads to harmful decisions such as corporate takeovers.

• Managers tend to constantly compare the sales, earnings and compensation of their firm not only with true competitors, but also with companies well beyond their industry. These comparisons help to invite “corporate hyperactivity.”

• Most managers have an exaggerated sense of their own abilities.

Financial Tenets

7. Focus on return on equity, not earnings per share.

Buffett does not take quarterly or annual results too seriously when studying company financials. He finds it better to focus on three- to five-year averages to gain a feel for the financial strengths of a company.

While Wall Street typically measures company performance by studying earnings per share, Buffett looks for strong and consistent return on equity that is achieved without excess leverage or accounting gimmickry.

The AAII Buffett Hagstrom screen looks for return on equity above 15% over the last four quarters and for each of the last three fiscal years.

Companies can increase return on equity by increasing asset turnover, widening profit margins or increasing financial leverage. Buffett is not against the use of debt—financial leverage—but warns against excessive use of debt. Acceptable levels of debt vary from industry to industry, so a filter was added to the screen that requires debt-to-equity ratios to be below the respective industry norm.

8. Calculate “owner earnings.”

Buffett looks beyond earnings and even cash flow to measure company performance. Buffett judges performance using “owner earnings,” which Hagstrom defines as net income plus noncash charges of depreciation and amortization less capital expenditures (capex) and any additional working capital that might be needed. This is similar to the calculation of free cash flow, which also subtracts dividend payments.

9. Look for companies with consistent and high profit margins.

Buffett seeks franchise companies selling goods or services in which there is no effective competitor, either due to a patent or brand name or a similar intangible that makes the product unique. These companies typically have high profit margins because of their unique niche; however, simple screens for high margins may only highlight firms within industries with traditionally high margins. The AAII Buffett Hagstrom screen looks for companies with operating margins and net profit margins above their industry norms. Operating margin concerns itself with the costs directly associated with the production of goods and services, while net margin takes all of the company activities and actions into account. Follow-up examinations should include a detailed study of the firm’s position in the industry and how it might change over time.

10. For every dollar retained, make sure the company has created at least one dollar of market value.

The market recognizes companies that use retained earnings unproductively through weak price performance. Buffett feels that companies with good long-term prospects run by shareholder-oriented managers will gain market attention, which results in a higher market price. The AAII Buffett Hagstrom screen requires at least a dollar-for-dollar share price increase for each dollar added to retained earnings over the last five years.

Valuing a Stock

11. What is the value of the business?

Even if you have identified a good company, it does not necessarily represent a good investment unless it can be purchased at a reasonable price.

12. Purchase stock if it can be acquired at a significant discount to its valuation.

Many investors turn to simple multiples, such as the price-earnings (P/E) ratio, to help establish a preliminary hurdle before an in-depth analysis is performed. Since Buffett likes to focus on free cash flow, the price-to-free-cash-flow (P/FCF) ratio is used in the screen.

The lower the price-to-free-cash-flow ratio, the better. However, a company with higher growth deserves to trade at a higher multiple than a slower-growing firm. To adjust for varying growth rates, the price-to-free-cash-flow ratio was divided by the free-cash-flow growth rate to help equate value to growth. The 30 companies with the lowest ratio of price to free cash flow to free-cash-flow growth are presented in the final screening results.

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Summing It Up

Buffett’s approach identifies “excellent” businesses based on the prospects for the industry and the ability of management to exploit opportunities for the ultimate benefit of shareholders. He then waits for the share price to reach a level that would provide him with a desired long-term rate of return.

Most investors have little trouble understanding Buffett’s philosophy. The approach encompasses many widely held investing principles. Its successful implementation is dependent on the dedication of the investor to learning and following the principles. It requires the ability to stick to the approach during times of market volatility. But for individual investors willing to do the considerable homework involved, the Buffett approach offers a proven path to investment value.

Stocks Passing the Buffett Hagstrom Screen (Ranked by the Ratio of Price to Free Cash Flow to Free-Cash-Flow Growth)

Keep in mind that no matter how well a stock screening methodology has performed (or how badly it has underperformed) over the long term, stock screening is only the first step in the stock selection process. You will want to do your homework to see why these companies are at their current levels. Only then will you gain insight into those that will continue to languish and those that may eventually flourish.

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence to verify the financial strength of the passing companies and to identify those stocks that match your investing tolerances and constraints before committing your investment dollars. Keep in mind that the quantitative screens AAII has developed are based upon our interpretations of published works tied to the market gurus.

Charles Rotblut leads a class in AAII’s new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

Featured Tickers:

PYLD

• How a PIMCO multisector bond ETF combines diversification, active management and macroeconomic tools to pursue yield and manage risk

• Differences from traditional bond funds, including broader credit exposure and a flexible strategy

• How interest rates, credit quality and market conditions impact performance and risk

Sonali Pier is a managing director and portfolio manager at PIMCO’s Newport Beach office, where she is the lead portfolio manager for diversified income. Cynthia McLaughlin and Charles Rotblut, CFA, talked with Pier in early March about PIMCO Multisector Bond Active ETF (PYLD) and what makes it unique.

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These tables show the top 25 and bottom 25 exchange-traded funds (ETFs) and mutual funds for the first quarter of 2026. Energy’s dominance was linked to geopolitical uncertainty. Oil-themed commodity funds were lifted by surging oil prices. Digital assets and growth-oriented funds underperformed. Rising uncertainty from trade tensions and the Iran war along with interest rate concerns quelled investors’ appetites for risk.

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Neutral sentiment among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and pessimism increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 1.0 percentage points to 39.3%. Bullish sentiment is above its historical average of 37.5% for the fourth consecutive week.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 4.7 percentage points to 24.1%. Neutral sentiment is below its historical average of 31.5% for the 95th time in 97 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 3.7 percentage points to 36.6%. Bearish sentiment is above its historical average of 31.0% for the 14th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 2.7 percentage points to 2.7%. The bull-bear spread is below its historical average of 6.5% for the 13th time in 14 weeks.

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This week’s special question asked AAII members what type of stocks they are favoring right now.

Here is how they responded:

• Growth stocks: 21.1%

• Dividend stocks: 17.0%

• Value stocks: 13.2%

• Small-cap stocks: 4.5%

• A mix of the above/other: 43.8%

This week’s Sentiment Survey results:

Bullish: 39.3%, up 1.0 points
Neutral: 24.1%, down 4.7 points
Bearish: 36.6%, up 3.7 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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Semiconductor and other technology-related stocks with exposure to artificial intelligence (AI) are having a moment. Many have soared in price since the ceasefire between the U.S. and Iran was announced at the end of March. Price spikes by themselves do not signal a bubble. But, they do raise questions as to whether there is too much exuberance.

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There are ratios and other fundamental indicators that you can look at to determine whether the higher prices are warranted and if additional outperformance is possible. This week, I share several of these with you. Most are available to you as data fields in AAII’s My Portfolio tool should you want to build a custom view to track certain stocks.

In creating the tables below, I handpicked a sample of five technology-related stocks whose prices have risen significantly over the past several weeks. All were required to have reported this earnings season. They also all have exposure to AI directly or through chips and data centers.

Earnings Surprises and Estimate Revisions

Earnings for the most recently completed quarter topped analysts’ expectations for all five companies. The standardized unexpected earnings (SUE) score was high for three of these companies: Alphabet Inc. (GOOGL), Intel Corp. (INTC) and Sandisk Corp. (SNDK). The SUE score factors in the spread between analysts’ estimates. Larger SUE scores indicate a truer surprise.

The earnings estimate revision metrics in this table show the extent to which analysts raised or lowered their expectations for future profits. Large percentage changes can occur when the older estimate is a small number. Analysts raised their full-year earnings estimates for Intel from $0.507 to $1.086 per share over the past 30 days. This is still significant because it implies a doubling of expected earnings. Notably, Corning Inc.’s (GLW) estimate revisions are smaller than the recent big jump in its stock price implies.

Earnings Growth Forecast

The enthusiasm in AI-related stocks is based on the perception of strong future earnings growth. Analysts are mostly forecasting very strong growth for these companies. Notably, analysts expect Alphabet’s earnings to stay relatively unchanged next year before resuming strong growth in 2028. Analysts call for the company to earn $14.230 per share this year, $14.465 per share in 2027 and $17.022 per share in 2028.

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Intel’s very weak A+ Investor Growth Grade of F reflects its struggles over the past several years.

When looking at a company’s long-term earnings estimates, pay attention to how many analysts are providing forecasts. Only two analysts provide long-term growth rates for Intel, while just one does for Sandisk.

Valuations

Strong expected growth rarely comes cheap, and that is what we generally see in the table below. The A+ Investor Grades for all five stocks are F (ultra expensive). While Alphabet’s price-earnings-to-earnings growth (PEG) ratio of 1.9 might seem reasonable to growth investors, its price-to-sales (P/S) ratio of 11.1 ranks among the most expensive 10% of stocks.

Fundamental Quality

One key thing separating these companies from those of the late 1990s dot-com era is financial strength. Four of the five companies have a Quality Grade of either A (very strong) or B (strong). The return on assets (ROA) varies by company but is generally above the companies’ respective industry and sector medians. Intel has a negative return on assets because it incurred a full-year loss in 2025. The negative accruals-to-assets ratios are a good sign because they signal that net income is not exceeding cash from operations for any of the five companies.

Overall, the data shows fundamentally sound companies that are performing better than analysts expect. Future growth is projected to be generally strong, but investors are paying a high valuation for that growth. While the market is not partying like it’s 1999, the valuations of these stocks, and other AI-related stocks, imply elevated downside risk if the companies stumble.

More on AAII.com

• Profiting From Analysts’ Revisions to Earnings Estimates
  AAII tracks a series of separate screens that look for companies with recent earnings estimate revisions.

• AAII’s Quality Grade Undergoes Expansion: Looking Behind the Curtain
  Based on research into various components that reflect a company’s “quality,” we tweaked the quality grade for stocks.

• Stock Market Winners: Nine Rules to Identify the Next Outperformers
  The May 2026 AAII Journal discusses how examining promising stocks that rose to “super-stock” status reveals shared traits that can be used for screening.

  
  AAII Sentiment Survey

Neutral sentiment among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and pessimism increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 1.0 percentage points to 39.3%. Bullish sentiment is above its historical average of 37.5% for the fourth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 4.7 percentage points to 24.1%. Neutral sentiment is below its historical average of 31.5% for the 95th time in 97 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 3.7 percentage points to 36.6%. Bearish sentiment is above its historical average of 31.0% for the 14th consecutive week.

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The bull-bear spread (bullish minus bearish sentiment) decreased 2.7 percentage points to 2.7%. The bull-bear spread is below its historical average of 6.5% for the 13th time in 14 weeks.

This week’s special question asked AAII members what type of stocks they are favoring right now.

Here is how they responded:

• Growth stocks: 21.1%

• Dividend stocks: 17.0%

• Value stocks: 13.2%

• Small-cap stocks: 4.5%

• A mix of the above/other: 43.8%

This week’s Sentiment Survey results:

Bullish: 39.3%, up 1.0 points
Neutral: 24.1%, down 4.7 points
Bearish: 36.6%, up 3.7 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

Investors have grown increasingly concerned about the sustainability of artificial intelligence (AI) spending, as large information technology companies commit significant capital to data centers, related infrastructure and AI capability. This cohort has traditionally not carried debt but is becoming a meaningful part of the investment-grade bond universe. Technology companies issued a record $108.7 billion in bonds in the fourth quarter of 2025, according to Moody’s Analytics.

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Featured Tickers: FXNC, MFG, STRT

• Explains how past winning stock traits help identify potential future outperformers

• Shows a value-focused strategy that focuses on quarterly earnings momentum

• Emphasizes stock screens as starting tools with further research necessary before making decisions

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Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 0.2 percentage points to 38.3%. Bullish sentiment is above its historical average of 37.5% for the third time in 12 weeks.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 6.6 percentage points to 28.7%. Neutral sentiment is below its historical average of 31.5% for the 94th time in 96 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 6.7 percentage points to 33.3%. Bearish sentiment is above its historical average of 31.0% for the 13th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 6.9 percentage points to 5.4%. The bull-bear spread is below its historical average of 6.5% for the 12th time in 13 weeks.

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This week’s special question asked AAII members what they thought about the Federal Reserve’s decision to keep interest rates unchanged.

Here is how they responded:

• They should have raised rates: 7.5%

• It was the right move: 71.7%

• They should have cut rates: 15.0%

• Not sure/no opinion: 5.8%

This week’s Sentiment Survey results:

Bullish: 38.3%, up 0.2 points
Neutral: 28.7%, up 6.6 points
Bearish: 33.0%, down 6.7 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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Two recent events in the AAII model portfolios significantly increased their cash positions. First, Vistance Networks Inc. (VISN), which is held in the VMQ Stocks model portfolio, issued a special distribution of $10.00 per share in April. Then, on Tuesday, a portfolio deletion alert was issued for AAII Dividend Investing (DI) model portfolio holding Texas Instruments Inc. (TXN). The stock’s total gain since being added to the DI model portfolio in 2013 was nearly 1,200%.

Subscribers who own shares of Vistance Networks and/or chose to sell Texas Instruments may be wondering what to do with the extra cash. Realizing a big capital gain is a nice problem to have.

There is no single rule for what to do with a big influx of cash from a stock sale or return of capital. Rather, the choice depends on your personal situation. You can use the following guidelines to help determine what is best for you.

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Account Type Considerations

The type of account where the cash lands influences what you do.

• Taxable Accounts: If you sell an investment for a big gain, the proceeds will be taxable if held in a taxable account. Consider how much, if any, of the proceeds are needed to cover applicable capital gains taxes. The remaining amount can then be used for other purposes, including reinvestment. (A return of capital reduces your cost basis but does not trigger capital gains taxes as long as your cost basis remains above $0. However, your future capital gains taxes will be larger because of the reduced cost basis.)

• Retirement Accounts: Capital gains realized and returns of capital received in an individual retirement account (IRA), Roth IRA or other retirement account are not taxable. This narrows the decision to funding an upcoming withdrawal—such as your required minimum distribution (RMD)—or reinvesting. Reinvesting is a possibility if your broker allows you to take an in-kind distribution to fulfill your RMD. (An in-kind distribution allows you to withdraw shares instead of cash.)

Allocation Considerations

Here are the options for allocating the excess cash.

• Reallocate to an Underweighted Stock: The AAII model portfolios follow a quasi-equal-weight approach. The target allocation is the average dollar size of all positions. For instance, the VMQ model portfolio holds 20 stocks. The target percentage allocation to each stock is therefore 5%. (In dollar terms, the calculation is total portfolio value divided by 20.) Several AAII portfolios, including VMQ and DI, reinvest excess cash into an underweighted holding that meets the strategy’s criteria. This approach helps reduce stock-specific (unsystematic) risk within the portfolio.

• Reinvest in the Security That Returned Capital: If you still find the stock, real estate investment trust (REIT) or master limited partnership (MLP) that returned the capital attractive, you could reinvest in it. In doing so, understand that cost basis in the original position will have been lowered by the return of capital, while the reinvested amount will have its own cost basis.

• Invest in a New Stock: The Model Shadow Stock Portfolio allocates the proceeds from a big gain in a removed stock among two or more stocks. This keeps one big position from turning into another big position. This is important because it is impossible to predict which stock will be the next big winner in your portfolio.

• Put the Excess Cash Into an Index Fund: This is a good default option. It works particularly well if you are not ready to buy another stock right now—say, because you don’t have the time to research a new idea. Broad index funds allow you to maintain your allocation. Exchange-traded funds (ETFs) such as the iShares Dow Jones U.S. ETF

• (IYY) are also easy to move out of once you identify a new stock or other security to invest in.

• Rebalance: The influx of cash gives you an opportunity to rebalance your overall portfolio if it has strayed from your target allocation. This can involve boosting your exposure to foreign ETFs, bonds or other underweighted asset classes.

Keeping the proceeds in cash is also an option. While this works if there is a tax liability or a withdrawal need, there is always an opportunity cost to staying in cash rather than putting the excess back to work.

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More on AAII.com

• The Role Cash Plays in Individual Investors’ Portfolios
  Insights into what investors do with their liquid investments and why.

• The Power of Holding Some Cash in a Portfolio
  An allocation to cash can make sense in many portfolios both to reduce risk and, for retirees, to facilitate increased risk.

• Active Multisector Bond ETF Maintains Resilience Through Diversification
  Our May 2026 AAII Journal fund manager interview reveals that a key tenet of PIMCO’s multisector portfolio is emphasizing diversification using a full macroeconomic toolkit.

  
  AAII Sentiment Survey

Pessimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, optimism and neutral sentiment increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 0.2 percentage points to 38.3%. Bullish sentiment is above its historical average of 37.5% for the third time in 12 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 6.6 percentage points to 28.7%. Neutral sentiment is below its historical average of 31.5% for the 94th time in 96 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 6.7 percentage points to 33.3%. Bearish sentiment is above its historical average of 31.0% for the 13th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 6.9 percentage points to 5.4%. The bull-bear spread is below its historical average of 6.5% for the 12th time in 13 weeks.

This week’s special question asked AAII members what they thought about the Federal Reserve’s decision to keep interest rates unchanged.

Here is how they responded:

• They should have raised rates: 7.5%

• It was the right move: 71.7%

• They should have cut rates: 15.0%

• Not sure/no opinion: 5.8%

This week’s Sentiment Survey results:

Bullish: 38.3%, up 0.2 points
Neutral: 28.7%, up 6.6 points
Bearish: 33.0%, down 6.7 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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This week, we cover James O’Shaughnessy’s Tiny Titans stock-picking strategy and give you a list of stocks currently passing the AAII O’Shaughnessy Tiny Titans screen based on the approach. The O’Shaughnessy Tiny Titans strategy focuses on micro-cap stocks that meet specific criteria for value, size and momentum.

For investors with patience and the ability to withstand the higher short-term volatility and risk of micro-cap stocks, there is potential for strong long-term returns. As of April 30, 2026, AAII’s O’Shaughnessy Tiny Titans screening model has an annual average gain since inception in 1998 of 26.0%, versus 7.4% for the S&P 500 index over the same period.

Investing in Micro-Cap Companies Using the O’Shaughnessy Tiny Titans Screen

AAII tracks several screens from O’Shaughnessy, the founder and chair of O’Shaughnessy Asset Management LLC, an asset management firm headquartered in Stamford, Connecticut. The O’Shaughnessy screens that AAII has developed are based on the strategies outlined in his books “What Works on Wall Street” (Fourth Edition, McGraw-Hill, 2011) and “Predicting the Markets of Tomorrow” (Penguin Group, 2006). It is from the latter book that the concept of the Tiny Titans approach was derived.

The Tiny Titans approach focuses on micro-cap stocks. Much research has been done regarding the success of investing in this market-capitalization category. AAII’s Model Shadow Stock Portfolio is based on a study showing that small- and micro-cap stocks tend to outperform the overall market over long periods.

O’Shaughnessy believes the reason for this outperformance is that few analysts follow these small stocks. Also, many institutional investors and mutual funds cannot trade these stocks without moving the price due to the relatively small number of outstanding shares. This leaves room for surprises, which can lead to a performance “pop.” O’Shaughnessy also says that micro-cap stocks have a low correlation with the overall stock market, making them a potential hedge in a portfolio of larger-cap stocks.

Low Price-to-Sales Ratio and Strong Price Strength Relative to the Market

AAII’s version of O’Shaughnessy’s Tiny Titans stock screen consists of very few criteria. First, all foreign and over-the-counter (OTC) stocks are eliminated. Next, a stock’s market cap must be between $25 million and $250 million.

After filtering out the larger-cap stocks, the Tiny Titans screen looks for stocks with price-to-sales (P/S) ratios of less than 1.00. The price-to-sales ratio compares the current stock price to the company’s sales per share. O’Shaughnessy uses this as a proxy for “cheapness,” as opposed to a price-earnings (P/E) ratio. He reasons that all viable companies have sales, and sales are harder to manipulate than earnings. In the third edition of “What Works on Wall Street,” O’Shaughnessy found that stocks with low price-to-sales ratios produced higher returns.

Finally, O’Shaughnessy thinks that investors should hold 25 stocks in this micro-cap portfolio to diversify the risk that goes along with investing in such volatile stocks. He narrowed his list to the 25 stocks with the highest 52-week relative strength compared to the S&P 500 index. Therefore, AAII tracks only those 25 companies with the highest 52-week relative strength each mont

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For a stock investing strategy to be useful, it must be investable. That means that a quantitative approach needs to generate a large enough universe of passing companies on which to perform additional due diligence to identify investment candidates. Since the O’Shaughnessy Tiny Titans screen looks for the 25 companies with the highest price strength over the last year after applying the market-cap and value filters, there are always companies passing. Keep in mind, however, that there may be periods when the companies with the “best” price strength may still be down over the last 52 weeks. The Tiny Titans methodology looks for those companies with the strongest price performance, but not necessarily a positive price change.

Members are looking for your input. Can you help with this question from the Stock Screening & Analysis Community?

“How might you apply O’Shaughnessy’s multifactor approach to managing volatility and timing allocations during shifting long-term market cycles and mean-reversion phases?”

Click here and then choose the Join Community button on the right to answer this question or read their responses.

Tiny Titans Screen Criteria

Here is the full list of criteria used in conjunction with AAII’s Stock Investor Pro software to screen for stocks passing the O’Shaughnessy Tiny Titans screen:

• Companies not based in the U.S. are excluded

• Companies that trade on the OTC market are excluded

• Market cap for the latest fiscal quarter (Q1) is greater than or equal to $25 million and is less than or equal to $250 million

• The price-to-sales ratio is less than 1.00

• The final results are the 25 companies with the highest relative price strength over the last 52 weeks

Stocks Passing the O’Shaughnessy Tiny Titans Screen (Ranked by 52-Week Relative Strength)

Keep in mind that no matter how well a stock screening methodology has performed (or how badly it has underperformed) over the long term, stock screening is only the first step in the stock selection process. You will want to do your homework to see why these companies are at their current levels. Only then will you gain insight into those that will continue to languish and those that may eventually flourish.

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence to verify the financial strength of the passing companies and to identify those stocks that match your investing tolerances and constraints before committing your investment dollars. Keep in mind that the quantitative screens AAII has developed are based upon our interpretations of published works tied to the market gurus.

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Featured Tickers:IVV,WTI

• Explains how prediction markets work, including event contracts and pricing

• Compares event contracts to stocks, options and futures, highlighting differences

• Examines risks, regulation and possible practical uses of prediction markets

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Paul Merriman leads a class in AAII’s new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

• Investing success depends on emotional resilience—the ability to stay invested through volatile markets

• Traditional risk metrics miss real risk; portfolios should be evaluated by behavioral challenges

• Choosing a sustainable portfolio mix helps investors endure downturns and achieve long-term financial success

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Optimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, neutral sentiment and pessimism increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 7.9 percentage points to 38.1%. Bullish sentiment is above its historical average of 37.5% for the second time in 11 weeks.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 2.6 percentage points to 22.2%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 93rd time in 95 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased 5.3 percentage points to 39.7%. Bearish sentiment is above its historical average of 31.0% for the 12th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 13.2 percentage points to –1.6%. The bull-bear spread is below its historical average of 6.5% for the 11th time in 12 weeks.

This week’s special question asked AAII members how they would describe the current valuation of stocks.

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Here is how they responded:

• Stocks, in general, are overvalued: 44.1%

• Stocks, in general, are fairly valued: 16.2%

• Valuations are mixed, with some stocks expensive and others cheap: 34.9%

• Stocks, in general, are undervalued: 1.8%

• Not sure/no opinion: 3.1%

This week’s Sentiment Survey results:

Bullish: 38.1%, down 7.9 points
Neutral: 22.2%, up 2.6 points
Bearish: 39.7%, up 5.3 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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I made the broader point about not assuming that all ETFs are cheap at last week’s BetterInvesting National Convention. Afterward, it occurred to me that having examples in my presentation would have better emphasized the point. It is always challenging to know exactly how much information can be put into a slide deck without going over the time limit.

So, when I got home, I used AAII’s ETF Screener to identify large-cap ETFs with at least $1 billion in assets under management (AUM) that had high expense ratios. I found eight ETFs whose expense ratios rank in the top 20% of their respective categories and have been in existence for at least one year.

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The average expense ratio for these eight ETFs was 0.75%. To put this into perspective, the average expense ratios for the large blend, large growth and large value categories are 0.43%, 0.50% and 0.37%, respectively. It is easy to find ETFs with expense ratios of 0.10% or lower in these categories.

Here are those eight costly ETFs.

Taxes add to the cost of ownership. Akre Focus ETF (AKRE) has a tax-cost ratio of 0.95%. Davis Select US Equity ETF (DUSA) has a tax-cost ratio of 0.56%. These numbers imply that an investor in the highest tax bracket saw their returns reduced by 0.95% and 0.56% by taxes owed on the distributions. (The tax-cost ratio assumes that the ETF is held in an individual taxable account.)

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Active Management Is a Common Thread

The continuing growth of active fund management within the ETF industry is a common thread connecting these eight ETFs.

Two of the ETFs, Akre Focus and Kovitz Core Equity ETF (EQTY), formerly existed as actively managed ETFs. Davis Select US Equity and Oakmark U.S. Large Cap ETF (OAKM) make use of the approaches followed by their respective issuers’ mutual funds. In all four cases, the higher expenses can be attributed at least in part to the fund sponsors’ backgrounds in running actively managed mutual funds.

This is part of a broader trend. Sponsors of actively managed mutual funds have been moving into the ETF space. We are about to see many more. Last month, Dimensional Fund Advisors launched DFA US Micro Cap ETF (DFMC), a share class of DFA U.S. Micro Cap I fund (DFSCX). While Dimensional Fund Advisors’ funds are lower cost, I expect many of the forthcoming ETF share classes of actively managed mutual funds to have high expense ratios for their respective ETF categories.

The importance of low expense ratios is a drum that we at AAII constantly beat. The less you spend on fund expenses, the more money you have to save and invest. This is a point I emphasized while speaking at the BetterInvesting National Convention.

More expensive large-cap ETFs exist. What separates these eight is that they are widely held, with each having more than $1 billion in AUM. Investors are buying them without considering the cost of ownership something we encourage you to never do.

More on AAII.com

• Active Strategies That Have Fared Well Among Mutual Funds and ETFs
  When evaluating active strategies, consider manager tenure, differentiated strategies and segments with less competition for active managers.

• The Great Migration: What’s Behind ETF Asset Growth
  A growing number of asset managers are converting traditional mutual funds into ETFs or preparing to offer ETFs as a mutual fund share class.

• Using New Highs and New Lows to Measure Market Breadth
  The new highs/new lows indicator provides a simple yet powerful window into the market’s internal health, as illustrated in the April 2026 AAII Journal.

  
  AAII Sentiment Survey

Optimism among individual investors about the short-term outlook for stocks decreased in the latest AAII Sentiment Survey. Meanwhile, neutral sentiment and pessimism increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 7.9 percentage points to 38.1%. Bullish sentiment is above its historical average of 37.5% for the second time in 11 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, increased 2.6 percentage points to 22.2%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 93rd time in 95 weeks.

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Bearish sentiment, expectations that stock prices will fall over the next six months, increased 5.3 percentage points to 39.7%. Bearish sentiment is above its historical average of 31.0% for the 12th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) decreased 13.2 percentage points to –1.6%. The bull-bear spread is below its historical average of 6.5% for the 11th time in 12 weeks.

This week’s special question asked AAII members how they would describe the current valuation of stocks.

Here is how they responded:

• Stocks, in general, are overvalued: 44.1%

• Stocks, in general, are fairly valued: 16.2%

• Valuations are mixed, with some stocks expensive and others cheap: 34.9%

• Stocks, in general, are undervalued: 1.8%

• Not sure/no opinion: 3.1%

This week’s Sentiment Survey results:

Bullish: 38.1%, down 7.9 points
Neutral: 22.2%, up 2.6 points
Bearish: 39.7%, up 5.3 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

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• What the January Barometer shows historically for the AAII Model Shadow Stock Portfolio’s performance

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• Explains how dividend yield helps identify potentially undervalued stocks

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• Shows how AAII’s High Relative Dividend Yield screen selects financially strong dividend stocks

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Optimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile neutral sentiment and pessimism decreased.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 14.3 percentage points to 46.0%. Bullish sentiment is above its historical average of 37.5% for the first time in 10 weeks.

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Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 5.9 percentage points to 19.5%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 92nd time in 94 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 8.4 percentage points to 34.4%. Bearish sentiment is above its historical average of 31.0% for the 11th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 22.7 percentage points to 11.6%. The bull-bear spread is above its historical average of 6.5% for the first time in 11 weeks.

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This week’s special question asked AAII members if they think other investors are too bullish or too bearish right now.

Here is how they responded:

• They are too bullish: 45.6%

• Their sentiment toward the market is about right: 17.2%

• They are too bearish: 27.8%

• Not sure/no opinion: 9.5%

This week’s Sentiment Survey results:

Bullish: 46.0%, up 14.3 points
Neutral: 19.5%, down 5.9 points
Bearish: 34.4%, down 8.4 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

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As a reminder, the monthly charts of interest highlights charts and tables I’ve come across that have not made their way into other AAII commentaries.

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How Much Is That Rental Car?!

Shares of Avis Budget Group Inc. (CAR) ended Tuesday, April 22, up 390% month to date, before pulling back yesterday and today. The surge is being attributed to a short squeeze. A short squeeze is a run-up in a stock’s price that is intensified when short sellers buy shares to close out their positions. Short squeezes occur because the potential losses from holding a short position are unlimited.

According to Barron’s and other media outlets, about 71% of the company is owned by SRS Investment Management and Pentwater Capital Management combined. This has led to a relatively small float: the number of Avis Budget shares available for trading. The actual number may be even smaller than the listed 10.2 million float. The two firms reportedly hold derivatives that push their combined ownership above 100%.

Beyond this, there is not an identifiable catalyst for the stock’s run-up. Avis Budget filed a registration statement with the U.S. Securities and Exchange Commission (SEC) on March 27 to sell up to five million shares. That is about 14% of its currently outstanding shares.

Whenever a stock experiences this level of volatility, attempting to trade it is very risky.

Source: AAII.com. Data from QuoteMedia as of 4/22/2026.

“We’re Switching From Shoes to AI”

Shares of Allbirds Inc. (BIRD) had their own recent spike. The reason? Allbirds is switching from making and selling casual shoes—a business it was unsuccessful at—to renting out artificial intelligence (AI) computing power under the name NewBird AI.

The speculators who jumped into the stock in response to the announcement are already tripping over their shoelaces. As for me, I’m happy to hold onto my Allbirds sneakers while continuing to avoid the stock.

Source: AAII.com. Data from QuoteMedia as of 4/22/2026.

Bonds Have Become More Correlated to Stocks

Bonds have historically been suggested as diversifiers to stocks because the two have had negative to near-zero correlation. The relationship has changed so far this decade. Bonds have become positively correlated to stocks, according to investment firm AQR Capital Management.

Even at the current correlation levels, bonds still provide diversification benefits relative to stocks. The extent of this diversification depends on both the size of the allocation to bonds and how you get exposure to bonds. Holding individual bonds or defined-maturity bond funds will provide certainty of return. Owning a traditional bond exchange-traded fund (ETF) or mutual fund will expose you to more of the elevated correlation because their future returns are not certain.

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Prices at the Pump Lag Wholesale Gasoline Prices

Gas prices remain high across the country due to the Iran war. Even once the Strait of Hormuz is finally reopened, there will be a delay before we see relief. This is partially because prices at the pump lag wholesale prices, as this chart from The New York Times shows.

A friendly reminder not to direct your anger at the owner of your local gas station. They have very little control over prices.

Finally, a Reminder that Fund Expenses Matter

The only part of returns that investors have control over is costs. The higher the fees you pay, the higher the return you must realize just to break even with a lower-cost alternative.

Vanguard reminded investors of this in its new report, “50 years. 50 facts. Indexing since 1976.”

AAII Stock Bracket Challenge Championship Recap

The championship round of the AAII Stock Bracket Challenge went from being a rout to a nail-biter. Thirteenth seed JPMorgan Chase & Co. (JPM) got the better of 11th seed Alphabet Inc. (GOOGL) in terms of returns for the final week, after the latter went cold down the stretch.

Timing was a factor. Alphabet had a higher total return than JPMorgan over the entire challenge period.

We also saw the element of timing play out in the four-week returns for all 16 stocks included in the tournament. Amazon.com Inc. (AMZN), the third-most-favorited stock among AAII members, had the biggest overall gain at 20.6%. Like a college team basketball team whose shooting goes cold at the wrong time, Amazon was knocked out of the tournament early.

Both Alphabet and Amazon are great examples of how arbitrary time periods influence the reported performance numbers. One of the biggest advantages we individual investors have is never having to report our quarterly or annual performance.

Congratulations to Jim’s bracket for winning the challenge—and receiving a lifetime subscription to AAII Platinum. Second-place winner MyShots and third-place winner Dave’s EZ pick are receiving three- and one-year AAII Platinum subscriptions, respectively. Congratulations to the two of you as well. Thank you to the more than 800 AAII members who participated.

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  AAII Sentiment Survey

Optimism among individual investors about the short-term outlook for stocks increased in the latest AAII Sentiment Survey. Meanwhile neutral sentiment and pessimism decreased.

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Bullish sentiment, expectations that stock prices will rise over the next six months, increased 14.3 percentage points to 46.0%. Bullish sentiment is above its historical average of 37.5% for the first time in 10 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, decreased 5.9 percentage points to 19.5%. Neutral sentiment is unusually low and is below its historical average of 31.5% for the 92nd time in 94 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 8.4 percentage points to 34.4%. Bearish sentiment is above its historical average of 31.0% for the 11th consecutive week.

The bull-bear spread (bullish minus bearish sentiment) increased 22.7 percentage points to 11.6%. The bull-bear spread is above its historical average of 6.5% for the first time in 11 weeks.

This week’s special question asked AAII members if they think other investors are too bullish or too bearish right now.

Here is how they responded:

• They are too bullish: 45.6%

• Their sentiment toward the market is about right: 17.2%

• They are too bearish: 27.8%

• Not sure/no opinion: 9.5%

This week’s Sentiment Survey results:

Bullish: 46.0%, up 14.3 points
Neutral: 19.5%, down 5.9 points
Bearish: 34.4%, down 8.4 points

Historical averages:

Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%

See more Sentiment Survey results.

This week, we cover the Value on the Move strategy using historical growth and give you a list of stocks currently passing the AAII Value on the Move PEG With Historical Growth screen. Growth strategies have done well, but long-term studies still point to successful investing results by following a disciplined contrarian, value-driven strategy.

There are many popular metrics investors use to find mispriced stocks, but concerns over getting caught in a “value trap” loom. This occurs when a stock appears to be attractive based on valuation multiples, but the price remains depressed. The trap is that the stock’s seemingly low price is actually appropriate. A value trap can also occur when a stock is undervalued but other investors fail to catch on to the mispricing. A good way to avoid this problem is to look for stocks with characteristics besides a low valuation that would justify a higher price.

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The Value on the Move strategy focuses on finding stocks that are growing while currently trading at a reasonable price. As of March 31, 2026, AAII’s Value on the Move PEG With Historical Growth screen has an annual gain of 13.6% since inception in 1998, versus 7.0% for the S&P 500 index over the same period.

Value on the Move Strategy Overview

Value screens seek out companies trading with low prices relative to actual measures of company performance or assets. The price-earnings (P/E) ratio, or multiple, is computed by dividing a stock’s price by trailing 12-month earnings per share. The price-earnings ratio is followed closely because it embodies the market’s expectations of future company performance and risk through the price component of the ratio and relates it to historical company performance as measured by earnings per share.

However, a simple search for low price-earnings ratios can be misleading as a screen for undervalued stocks. Price-earnings ratios adjust to expectations of future earnings performance. Stocks with high expectations normally trade with high price-earnings ratios, while stocks with low perceived growth potential or low probability of achieving their growth potential trade with low price-earnings ratios. Simple screens for low price-earnings stocks without additional qualifiers typically turn up lists of troubled stocks or stocks with earnings expected to drop in the future. It is not uncommon to see firms in dying industries, companies on the brink of insolvency or even stocks facing potentially devastating litigation pass low price-earnings screens. Screening for high price-earnings stocks is not the answer either. While firms with high price-earnings ratios normally have everything going well for them now, investors have typically overpaid for their expectations.

As investors change their perceptions of the risk-reward possibility of a stock, the price-earnings multiple changes to reflect the new consensus. A stock that exceeds expectations could get a large price boost from an expansion of the price-earnings ratio coupled with the actual earnings increase. However, stocks with very high expectations often get hammered after issuing an earnings warning, as analysts decrease the price-earnings ratio they are willing to pay for the firm in addition to lowering future earnings estimates. Stock movement is not only controlled by the level of earnings, but it is also affected by results compared to expectations. Your analysis should focus on whether the market consensus of future earnings growth is realistic.

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Price-Earnings to Earnings Growth: The PEG Ratio

One of the most popular techniques used to balance the relationship of company value to growth involves simply relating the price-earnings ratio to its earnings growth. The price-earnings-to-earnings-growth (PEG) ratio is computed by dividing the price-earnings ratio by the earnings growth rate. Ratios below 1.0 indicate that a stock may be undervalued, while ratios above 1.0 indicate that a stock may be overvalued. The idea is to purchase a stock with demonstrated or expected earnings growth before the market recognizes the company’s potential and bids up the price-earnings ratio.

The PEG ratio can be created using either the historical or the expected growth rate. Investment analysis is forward-looking. While historical earnings are easy to view, expectations are more difficult to judge. Services such as S&P Global Market Intelligence collect and report analyst expectations of earnings, but many small-cap companies will have only a small number of analysts tracking earnings, if any at all.

A PEG ratio using expected growth should help to highlight firms with reasonable price-earnings ratios given their expected growth rates. Keep in mind that studies indicate that even analysts are normally too optimistic in their long-term growth forecasts for firms with high expectations. A PEG ratio constructed with historical earnings growth should highlight firms that are priced reasonably given their record of accomplishment. It should also highlight a broader range of companies. The weakness of relying solely on historical growth is that it may no longer be reflective of future potential.

Very high growth rates are not sustainable. Normally, growth rates above 20% per year cannot be sustained in the long term. Extremely high growth rates are usually due to special situations in which earnings for the base year of the growth rate calculation are near zero or negative. We do not set a floor or limit for the growth rate used in the PEG ratios, but you should carefully examine both the year-by-year historical figures and the basis of the expected company growth.

It is important to remember that the growth rate is a raw growth figure that does not divulge any change in trend or indicate the variability of earnings. The easiest and most direct way to judge earnings is to directly examine the earnings year by year, looking for stability and accelerating growth. As a basic screen, we require positive earnings per share from continuing operations for the trailing 12 months and each of the last five years.

Members are looking for your input. Can you help with this question from the Stock Screening & Analysis Community?

Do you find the Value on the Move PEG With Historical Growth strategy effective for avoiding value traps while still capturing sustainable, long-term growth opportunities? Why or why not?

Click here and then choose the Join Community button on the right to answer this question or read their responses.

Quarterly Earnings Strength

Value screens such as low price-earnings filters are good at identifying neglected firms, but secondary screens for quarterly earnings growth are useful complements. Quarterly earnings may indicate a change in the trend of earnings more quickly than just examining annual earnings figures. Quarterly earnings are closely examined by the market, and deviations from the expected norm are quickly rewarded or punished.

When studying quarterly earnings, you typically cannot compare one quarter to the previous quarter in a meaningful manner. It is more useful to look at “quarter-on-quarter” or “comparable-quarter” earnings changes (also called “year-over-year” changes), where one quarter is compared to the same quarter from the previous year. Many firms have annual seasonal cycles in either sales or production; the stronger the pattern, the more important it is to make quarter-on-quarter comparisons.

AAII’s Value on the Move PEG With Historical Growth screen requires that each of the last four quarters’ earnings per share be higher than that of the same quarter one year earlier.

As always, it is important to look at the factors leading to the growth and determine if the growth is sustainable. When examining a firm’s earnings patterns, it is necessary to carefully read both quarterly and annual reports, which can clue you in to possible explanations in the earnings growth pattern. Is the economy expected to slow down? Was a significant portion of the earnings growth achieved through acquisition or internal growth? Did earnings growth in a franchise come from increases in same-store sales or the opening of new stores? Did currency translations impact earnings? Are competitive conditions changing within the industry? Are margins increasing or decreasing? For example, without increasing sales and earnings from existing stores or steady or improving margins, earnings momentum may slow.

Price Momentum

Price momentum is often used as a signal that the market has recognized the relative attractiveness of a company. Price momentum is normally measured by comparing the stock price change to that of a market index or against a segment of stocks. Investors look for stock price performance better than that of other stocks with the belief that the rising price will attract other investors, who will drive up the price even more.

There are many tools used to measure price momentum; our screen relies on the relative strength rank. The relative strength rank indicates how a company’s stock price has performed relative to all other stocks. A rank of 50% indicates that the stock’s performance is better than 50% of all firms, while a rank of 90% indicates that a stock has outperformed 90% of all stocks. We specify a minimum relative strength rank of 70% over the last 26 weeks for our screen. Looking at performance over the last half year helps to identify stocks that have had relevant strong price performance.

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Patience Is Required

The table below presents the companies with low historical PEG ratios, along with their estimated PEG ratios. Both PEG ratios use the current price-earnings ratio, but they use different growth rates. The estimated PEG ratio is calculated using the S&P Global consensus estimate for the long-term earnings per share growth rate, while the historical PEG ratio is calculated using the historical five-year growth rate. The companies in the table are ranked by relative price strength.

Value screens attempt to identify undervalued stocks. However, patience is required while waiting for the market to recognize the value of a stock. Combining value with price and earnings momentum screens should help to identify reasonably priced stocks on the move. But always keep in mind that the purpose of these screens is to illustrate a potential useful combination of value and momentum analysis with real firms. The screens are a mere first step in the stock selection process.

Top 20 Stocks Passing the Value on the Move PEG With Historical Growth Screen (Ranked by 26-Week Relative Strength Rank)

Keep in mind that no matter how well a stock screening methodology has performed (or how badly it has underperformed) over the long term, stock screening is only the first step in the stock selection process. You will want to do your homework to see why these companies are at their current levels. Only then will you gain insight into those that will continue to languish and those that may eventually flourish.

The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence to verify the financial strength of the passing companies and to identify those stocks that match your investing tolerances and constraints before committing your investment dollars. Keep in mind that the quantitative screens AAII has developed are based upon our interpretations of published works tied to the market gurus.