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Whether you're a growth, value, income, or momentum-focused investor, building a successful investment portfolio takes skill, research, and a little bit of luck.
But what's the best way to find the right combination of stocks? Because funding things like your retirement, your kids' college tuition, or your short- and long-term savings goals will definitely require significant returns.
Enter the Zacks Rank.
What is the Zacks Rank?
The Zacks Rank is a unique, proprietary stock-rating model that utilizes earnings estimate revisions to help investors build a winning portfolio.
There are four main factors behind the Zacks Rank: Agreement, Magnitude, Upside, and Surprise.
Agreement is the extent to which all brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of analysts revising their estimates higher, the better chance the stock will outperform.
Magnitude is the size of the recent change in the consensus estimate for the current and next fiscal years.
Upside is the difference between the most accurate estimate, which is calculated by Zacks, and the consensus estimate.
Surprise is made up of a company's last few quarters' earnings per share surprises; companies with a positive earnings surprise are more likely to beat expectations in the future.
Each one of these factors is given a raw score that's recalculated every night, and then compiled into the Zacks Rank. Using this data, stocks are classified into five groups, ranging from "Strong Buy" to "Strong Sell."
The Power of Institutional Investors
The Zacks Rank also allows individual 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.
These investors are known for designing valuation models that focus on earnings and earnings expectations in order to figure out the fair value of a company and its shares. If earnings estimates are raised, it puts a higher value on a company.
Institutional investors will use these changes to help in their decision-making, typically buying stocks with rising estimates and selling those with falling estimates. Higher earnings expectations can translate into a rise in stock price and bigger gains for the investor.
Because it can take a long time for an institutional investor to build a position -- sometimes weeks, if not months -- retail investors who get in at the first sign of upward revisions have a distinct advantage over these larger investors, and can benefit from the expected institutional buying that will follow.
Not only can the Zacks Rank help you take advantage of trends in earnings estimate revisions, 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 Zacks Rank #1 (Strong Buy) stocks has beaten the market in 26 of the last 32 years, with an average annual return of +25.41%.
Moreover, stocks with a new #1 (Strong Buy) ranking have some of the biggest profit potential, while those that fell to a #4 (Sell) or #5 (Strong Sell) have some of the worst.
Let's take a look at Weyerhaeuser (WY), which was added to the Zacks Rank #1 list on April 28, 2021.
Based in Washington, Weyerhaeuser Company is one of the leading U.S. forest product companies with operations primarily concentrated in Southern California, Nevada, Washington, Texas, Maryland and Virginia. The company caters to a diverse clientele spread over the United States, Canada, Japan, Europe and other regions. The company grows and harvests trees, builds homes and manufactures forest products worldwide, primarily to be used as lumber, pulp and paper, and other wood and building products. It offers logs, hardwood lumber, timber, poles and plywood, as well as minerals, oil, gas, seeds and seedlings.
Four analysts revised their earnings estimate higher in the last 60 days for fiscal 2021, while the Zacks Consensus Estimate has increased $0.68 to $2.34 per share. WY also boasts an average earnings surprise of 265%.
Earnings are forecasted to see growth of 81.4% for the current fiscal year, and sales are expected to increase 24.6%.
Additionally, WY has climbed higher over the past four weeks, gaining 11.7%. The S&P 500 is up 5.4% in comparison.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Weyerhaeuser should be on investors' shortlist.
If you want even more information on the Zacks Ranks, or one of our many other investing strategies, check out the Zacks Education home page.
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