It doesn’t matter whether you’re a growth, value, income, or momentum-focused investor – building a successful investment portfolio takes skill, research, and a little luck.
How do you find the right combination of stocks that will generate returns that could fund your retirement, your children’s tuition, or your short- and long-term savings goals?
Enter the rank of Zacks.
What is the Zacks Rank?
A unique, proprietary stock valuation model, the Zacks Rank uses revisions to a company’s earnings estimates or changes to earnings expectations to help investors create a successful portfolio.
There are four main factors behind the Zacks rank: consistency, size, uptrend, and surprise.
Consent 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 higher, the greater the chance the stock will outperform.
The magnitude is the magnitude 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.
Surprise consists of the surprises in earnings per share in a company’s final quarters; Companies with a positive earnings surprise are more likely to exceed expectations in the future.
Each factor receives a raw value, which is recalculated every night and put together in the Zacks rank. Based on this data, stocks are divided into five different groups: Strong Buy, Buy, Hold, Sell, and Strong Sell.
The power of institutional investors
The Zacks Rank also enables retail 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.
To determine the fair value of a company and its stocks, these investors will create valuation models that focus on earnings and earnings expectations. Because when you increase the estimates for the bottom line, the result is higher fair value for a company.
Institutional investors will use these changes to aid decision-making and will typically buy stocks with estimates going up and sell stocks with estimates go down. Higher profit expectations can lead to a rise in the share price and greater profits for the investor.
Retail investors who join at the first sign of upward revisions have a clear advantage over larger investors, as it can often take weeks, if not months, for an institutional investor to build a position. You will also benefit from the expected institutional purchases that could follow.
Not only can the Zacks rank help you capitalize on trends in revising earnings estimates, 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 that ranked # 1 (strong buy) have some of the greatest opportunities to win, while those that have fallen to # 4 (sell) or # 5 (strong sell) have some of the worst.
Let’s look at Dicks sporting goods (DKS), which was added to the Zacks Rank 1 list on May 27, 2021.
DICK’S Sporting Goods Inc. was founded in New York in 1948 under the labels Dick’s Clothing and Sporting Goods, Inc. It was previously incorporated as Delaware Corporation and renamed Dick’s Sporting Goods, Inc. in April 1999 and is based in Coraopolis, Pennsylvania.
11 analysts have revised their earnings estimates upwards over the past 60 days for fiscal year 2022. The Zacks Consensus Estimate is up $ 2.70 to $ 7.62 per share. DKS shows an average surprise result of 136.8%.
Earnings growth of 24.5% is expected for the current financial year, while sales are expected to increase by 11.5%.
Additionally, DKS has risen higher in the past four weeks, gaining 18.1%. The S&P 500 is up 0.6% in comparison.
With a # 1 (Strong Buy) ranking, a positive trend in earnings forecast revisions, and strong market momentum, Dick’s Sporting Goods 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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