It doesn’t matter if you’re a growth, value, income, or momentum-focused investor — building a successful investment portfolio takes skill, research, and a little bit of luck.
But how do you find the right combination of stocks? Funding your retirement, your kids’ college tuition, or your short- and long-term savings goals certainly requires significant returns.
Enter the Zacks Rank.
What is the Zacks Rank?
A unique, proprietary stock-rating model, the Zacks Rank uses earnings estimate revisions, or changes to a company’s earnings expectations, to help investors create a winning portfolio.
There are four main factors behind the Zacks Rank: Agreement, Magnitude, Upside, and Surprise.
Agreement is the extent to which all brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of analysts revising their estimates higher, the better chance the stock will outperform.
Magnitude is the size of the recent change in the consensus estimate for the current and next fiscal years.
Upside is the difference between the most accurate estimate, which is calculated by Zacks, and the consensus estimate.
Surprise is made up of a company’s last few quarters’ earnings per share surprises; companies with a positive earnings surprise are more likely to beat expectations in the future.
Each one of these factors is given a raw score that’s recalculated every night, and then compiled into the Zacks Rank. Using this data, stocks are classified into five groups, ranging from “Strong Buy” to “Strong Sell.”
The Power of Institutional Investors
The Zacks Rank also allows individual investors, or retail investors, to benefit from the power of institutional investors.
Institutional investors are the professionals who manage the trillions of dollars invested in mutual funds, investment banks, and hedge funds. Studies have shown that these investors can and do move the market due to the large amounts of money they invest with. Because of this, the market tends to move in the same direction as institutional investors.
In order to determine the fair value of a company and its shares, institutional investors design valuation models that focus on earnings and earnings estimates. Because if you raise earnings estimates, it then creates a higher fair value for a company and its stock price.
With these changes, institutional investors will act, usually buying stocks with rising estimates and selling those with falling estimates. An increase in earnings expectations can potentially lead to higher stock prices and bigger gains for the investor.
Retail investors who get in at the first sign of upward revisions have a distinct advantage over larger investors since it can often take weeks, if not months, for an institutional investor to build a position. They’ll also benefit from the expected institutional buying that could follow.
Not only can the Zacks Rank help you take advantage of trends in earnings estimate revisions, but it can also provide a way to get into stocks that are highly sought after by professionals.
How to Invest with the Zacks Rank
The Zacks Rank is known for transforming investment portfolios. In fact, a portfolio of Zacks Rank #1 (Strong Buy) stocks has beaten the market in 26 of the last 32 years, with an average annual return of +25.41%.
Moreover, stocks with a new #1 (Strong Buy) ranking have some of the biggest profit potential, while those that fell to a #4 (Sell) or #5 (Strong Sell) have some of the worst.
Let’s take a look at Flex (FLEX), which was added to the Zacks Rank #1 list on August 28, 2021.
Singapore-based Flex Ltd (formerly known as Flextronics International Ltd) is a provider of “Sketch-to-Scale” services to original equipment manufacturers (OEMs). The company provides end-to-end services i.e. designing, engineering, manufacturing, as well as supply chain services & solutions.
Four analysts revised their earnings estimate upwards in the last 60 days for fiscal 2022. The Zacks Consensus Estimate has increased $0.11 to $1.81 per share. FLEX boasts an average earnings surprise of 30.4%.
Earnings are forecasted to see growth of 15.3% for the current fiscal year, and sales are expected to increase 7.7%.
FLEX has been moving higher over the past four weeks as well, up 4.2% compared to the S&P 500’s gain of 2.6%.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Flex should be on investors’ shortlist.
If you want even more information on the Zacks Ranks, or one of our many other investing strategies, check out the Zacks Education home page.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.