Top-down analysis is a central technique to use in order to find great stocks. It involves capturing a “big picture” view of the macro economy, then becoming more specific in order to end up with individual companies to invest in. An example process is the following: researching macro activity, then searching sector outlook, followed by digging into industry performance, then landing at investable companies within the industry.
Zacks Premium offers research services, named Zacks Sector Rank and Zacks Industry Rank, that cater to the popular approach of top-down analysis. Included is a sector rank, which moves deeper into an industry rank and ends up at individual stock ranks. Through Zacks Sector Rank and Zacks Industry Rank, investors can find an organized and impactful way to navigate Wall Street. To begin your free 30-day free trial of Zacks Premium, click here.
The sector ranking process is based on the powerful impact of company earnings estimates. Zacks Sector Rank is produced by calculating the average Zacks Rank of all the stocks in the sector, and then assigning an ordinal rank to it. Zacks Rank puts stocks between #1’s (Strong Buy) and #5’s (Strong Sell). So, a Zacks Sector Rank of 1.2 is better than 3.5.
A Live Example: The Financial Sector Today
Now, I’ll walk you through how to apply top-down analysis in today’s market with Zacks Sector Rank and Zacks Industry Rank.
Below is Zacks Premium’s Sector Rank heat map. Shown are sectors colored with red and green. The darker the red, the worse the sector rank is (higher numbers) and the lighter the green the better the sector rank is (lower numbers). Inside each box is the assigned rank to the sector. By toggling the menu, Zacks Premium users can follow the movement of sector ranks covering the past two months.
We can see that the Finance Sector includes 828 stocks, depicted inside the parenthesis, and has a Zacks Sector Rank #6 as of March 18, 2017. What’s important is the rank change that the Finance Sector experienced. Just a month prior, on February 11, 2017, the Financial Sector ranked #1. Digging deeper, we can go into the Financial Sector and see which industries caused this change.
So, as mentioned above, the Financial Sector has moved against the Zacks Sector Rank. However, this does not mean all stocks in the Financial Sector are bad investments; just because one fruit in the basket is spoiled does not mean all of them are.
We must utilize Zacks Industry Rank to see the full truth behind the changed rank of the Financial Sector. When clicking the plus button left of “Finance (828)”, a list of industries within the Financial Sector loads, as seen below. Again, colored with red and green, similar to the sector rank, the darker red the worse the industry rank is, and the lighter the green the better the industry rank is.
Consistent positive movement from January 21, 2017 to March 18, 2017 is seen with “Banks – Foreign,” which has 57 stocks in it; Foreign Banks currently has a Zacks Industry Rank #49 compared to a Zacks Industry Rank #86 two months prior. This means that the Foreign Bank Industry could hold investment opportunities due to bettering earnings estimate revisions. To find individual stocks within the Foreign Bank Industry, simply click on its name.
Pictured below is a new page that loads which provides specific information on the Foreign Bank Industry. On the page is a section named “Rank of Stocks”; this report gives individual stocks in the industry and their respective Zacks Rank. As you can see, Bank Of Montreal BMO, KB Financial Group KB, and Shinhan Financial Group SHG all hold a Zacks Rank #1 (Strong Buy) which indicates good investment opportunities within the improving earnings estimate revisions in the Foreign Bank Industry. To further dive into detail, the ticker of each company can be clicked on for a new page, which presents company specific information.
On the other hand, let’s take a look at an industry in the Financial Sector which has been continually downgraded: “Insurance - Brokerage.” This sector has 38 stocks and a current Zacks Industry Rank of #188, moving from Zacks Industry Rank of #55 in two months. When looking deeper into the Insurance Brokerage Sector, we can see that Patriot National PN and Validus Holdings VR hold a Zacks Rank #5 (Strong Sell) and probably should be avoided.
To reduce confusion, we discussed three different types of ranks: Zacks Sector Rank which ranks sectors, Zacks Industry Rank which ranks industries, and Zacks Rank which ranks stocks.
I know what you’re thinking: can it really be this straightforward? Yes! Zacks Sector Rank and Zacks Industry Rank have proven performance. From 2006-2015, and with weekly rebalancing, the top 50% of Zacks Rank Sectors outperformed the bottom 50% of Zacks Ranks Sector by two-fold.
Top-down analysis can seem intimidating to some investors, but it doesn’t have to be. The Zacks Sector Rank and the Zacks Industry Rank make top-down analysis simple, and can help investors easily find the best-positioned market segments for today’s trading environment.
However, such a powerful tool can only be found in Zacks Premium. Investors can see more about this service, including premium screens, the full Zacks Rank Strong Buy list, and more, by checking out this link for additional information: Start your free trial to Zacks Premium.
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Bank Of Montreal (BMO): Free Stock Analysis Report
Shinhan Financial Group Co Ltd (SHG): Free Stock Analysis Report
KB Financial Group Inc (KB): Free Stock Analysis Report
Validus Holdings, Ltd. (VR): Free Stock Analysis Report
Patriot National, Inc. (PN): Free Stock Analysis Report
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