Building a successful investment portfolio takes skill and hard work, whether you are a growth, value, income or momentum focused investor.
But how do you find the right combination of stocks? Funding your retirement, your children’s tuition, or your short- and long-term savings goals certainly requires significant returns.
Enter the rank of Zacks.
What is the Zacks Rank?
The Zacks Rank, a unique, proprietary stock valuation model, uses revisions to earnings estimates or changes to a company’s earnings expectations that make it easier to build 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 of these factors is given a raw value that is recalculated every night and then summarized to form the Zacks rank. Based on this data, stocks are divided into five groups, ranging from “strong buy” to “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.
In order to determine the fair value of a company and its shares, institutional investors design valuation models that are geared towards earnings and earnings estimates. Because when you raise earnings estimates, there is a higher fair value for a company and its share price.
Institutional investors then respond to these changes in earnings estimates by typically buying stocks with estimates going up and selling stocks with estimates going down; An increase in earnings estimates can lead to higher stock prices and greater profits for the investor.
Since it can take an institutional investor a long time 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 expected institutional purchases that follow become.
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 Louisiana Pacific (LPX), which was added to the Zacks Rank 1 list on May 28, 2021.
The Louisiana-Pacific Corporation is a leading manufacturer of sustainable, high-quality wood-based materials, products for structural engineering and exterior cladding for use in residential, industrial and light commercial construction. The company currently operates 20 modern, strategically located facilities in the United States and Canada, two facilities in Chile, and one facility in Brazil. It also operates facilities through a joint venture. The company’s products are mainly used in new residential construction, repairs, renovations and outdoors.
For fiscal 2021, four analysts have revised their earnings estimates upwards over the past 60 days, and the Zacks Consensus Estimate has increased $ 5.18 to $ 11.10 per share. LPX has an average earnings surprise of 40.5%.
Earnings growth of 157.5% and sales growth of 41.6% are forecast for the current financial year.
What’s even more impressive is that LPX has appreciated in value over the past four weeks, up 2% over the S&P 500’s 0.6% gain.
With a # 1 (Strong Buy) ranking, a positive trend in earnings forecast revisions, and strong market momentum, Louisiana Pacific should be shortlisted for 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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