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 what’s the best way to find the right combination of stocks? Because funding things like your retirement, your kids’ college tuition, or your short- and long-term savings goals will definitely require significant returns.
Enter the Zacks Rank.
What is the Zacks Rank?
The Zacks Rank is a unique, proprietary stock-rating model that utilizes earnings estimate revisions to help investors build 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.
These professionals manage the trillions of dollars invested in hedge funds, mutual funds, and investment banks, and studies have shown that they can and do move the market because of the large amounts of money they invest with. Thus, 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.
Institutional investors will use these changes to help in their decision-making, typically buying stocks with rising estimates and selling those with falling estimates. Higher earnings expectations can translate into a rise in stock price and bigger gains for the investor.
Because it can take a long time for an institutional investor to build a position — sometimes weeks, if not months — retail investors who get in at the first sign of upward revisions have a distinct advantage over these larger investors, and can benefit from the expected institutional buying that will 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 Silicon Motion (SIMO), which was added to the Zacks Rank #1 list on August 5, 2021.
Founded in 1995, Silicon Motion Technology Corporation is a leading developer of microcontroller ICs for NAND flash storage devices.
Four analysts revised their earnings estimate higher in the last 60 days for fiscal 2021, while the Zacks Consensus Estimate has increased $0.67 to $5.74 per share. SIMO also boasts an average earnings surprise of 16%.
Earnings are expected to grow 77.2% for the current fiscal year, while revenue is projected to increase 67.3%.
Even more impressive, SIMO has gained in value over the past four weeks, up 12.7% compared to the S&P 500’s gain of 2.9%.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Silicon Motion 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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