Whether you’re a growth, value, income, or dynamism 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 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?
As 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.
A raw value is assigned to these four factors, which is recalculated every night and then incorporated into the ranking system. 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.
Institutional investors are responsible for managing the trillions of dollars invested in mutual funds, hedge funds, and mutual banks. Research has shown that these investors can and do move the market because of the large amount of money they are trading, and therefore the market tends to move in the same direction as them.
These investors are known for developing valuation models that focus on earnings and earnings expectations to determine the fair value of a company and its stocks. When earnings estimates are raised, a company becomes more valued.
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.
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 Nvidia (NVDA), which was added to the Zacks Rank 1 list on July 3, 2021.
NVIDIA Corporation is the world’s leading provider of visual computing technologies and the inventor of the graphics processing unit, or GPU. Over the years, the company’s focus has shifted from PC graphics to artificial intelligence (AI) based solutions that now support high performance computing (HPC), games, and virtual reality (VR) platforms.
For fiscal 2022, 13 analysts have revised their earnings estimates upwards over the past 60 days, and the Zacks Consensus Estimate has increased $ 2.34 to $ 15.90 per share. NVDA has an average earnings surprise of 12%.
Earnings growth of 59% and sales growth of 48.7% are expected for the current financial year.
Additionally, NVDA is up over the past four weeks, gaining 16.6%. The S&P 500 is up 3.5% in comparison.
With a # 1 (Strong Buy) ranking, a positive trend in earnings forecast revisions, and strong market momentum, Nvidia 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.
Discover today’s top stocks
Our # 1 private Zacks ranking is based on our Zacks Rank quantitative stock valuation system and has more than doubled the S&P 500 since 1988. Applying Zacks rank in your own trade can increase your return on investment on your next trade. See today’s Zacks # 1 leaderboard >>
Would you like the latest recommendations from Zacks Investment Research? Today you can download the 7 best stocks for the next 30 days. Click here to get this free report