Whether you’re a growth, value, income, or dynamism investor, building a successful investment portfolio takes skill, research, and a little luck.
How do you find the right combination of stocks that produce returns that can fund your retirement, your children’s tuition, or your short and long term savings goals?
Enter the Zacks rank.
What is the Zacks Rank?
The Zacks Rank, a unique, proprietary stock rating model, uses earnings estimates revisions or changes in a company’s earnings expectations that make it easier to build a successful portfolio.
There are four main factors behind the Zacks rank: Match, Size, Up, and Surprise.
Agreement is the extent to which all brokerage analysts revise their earnings estimates in the same direction. The higher the percentage of analysts who revise their estimates, the greater the chance the stock will outperform.
The size is the size of the most recent change in the consensus estimate for the current and next fiscal year.
The benefit is the difference between the most accurate estimate computed by Zacks and the consensus estimate.
The surprise consists of the surprises in a company’s earnings per share over the past few quarters. Companies with a positive earnings surprise are more likely to exceed expectations in the future.
Each factor is given a raw rating, which is recalculated every night and compiled in the Zacks rank. Using this data, stocks are divided into five different groups: strong buy, buy, hold, sell, and strong sell.
The power of institutional investors
With the Zacks rank, individual investors or private investors can also benefit from the power of institutional investors.
Institutional investors are the professionals who manage the trillions of dollars invested in mutual funds, mutual banks, and hedge funds. Studies have shown that these investors can and do move the market because of the large amounts of money they invest with. Because of this, the market tends to move in the same direction as institutional investors.
To determine the fair value of a company and its stocks, institutional investors design valuation models that focus on earnings and earnings estimates. Because if you increase earnings estimates, it creates a higher fair value for a company and its share price.
Institutional investors will use these changes to aid in their decision-making. Typically, stocks are bought with rising estimates and stocks are sold with falling estimates. Higher profit expectations can lead to a rise in the share price and greater profits for the investor.
Since it can take a long time for an institutional investor to build a position – sometimes weeks if not months – retail investors who enter at the first sign of an upward correction have a distinct advantage over these larger investors and can benefit from the anticipated institutional purchase will follow.
Not only can the Zacks rank help you capitalize on trends in earnings estimate revision, 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 Zack’s Rank # 1 (Strong Buy) stocks has beaten the market for 26 over the past 32 years, with an average annual return of + 25.41%.
Additionally, stocks with a new ranking of # 1 (Strong Buy) have the greatest profit potential, while stocks with a ranking of # 4 (Sell) or # 5 (Strong Sell) have the worst.
Let’s take a look UFP Industries (UFPI), which was added to the Zacks No. 1 ranking on March 2, 2021.
UFP Industries, Inc., headquartered in Grand Rapids, MI, is a holding company with subsidiaries in North America, Europe, Asia and Australia. The company supplies wood, wood composites and other products to the retail, industrial and construction markets.
Three analysts have revised their earnings estimates upwards over the past 60 days for fiscal year 2021. The Zacks consensus estimate has increased $ 1.50 to $ 6.34 per share. UFPI has an average earnings surprise of 59.8%.
Earnings are expected to increase 58.5% for the current fiscal year, while sales are expected to increase 55.5%.
The UFPI has also risen over the past four weeks, up 3.5% compared to the S&P 500’s 0.6% loss.
With a # 1 ranking (Strong Buy), a positive trend in earnings revision and strong market momentum, UFP Industries should be on the shortlist of investors.
For more information on the Zacks Ranks or one of our many other investment strategies, please visit the Zacks Education homepage.
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