Building a successful investment portfolio takes skill and hard work, no matter if you're a growth, value, income, or momentum-focused investor.
How do you find the right combination of stocks that will generate returns that could fund your retirement, or your kids' college tuition, or your short- and long-term savings goals?
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.
These four factors are assigned a raw score that's recalculated every night, which is then compiled into the ranking system. Stocks are classified into five groups using this data, 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.
Institutional investors are responsible for managing the trillions of dollars invested in mutual funds, hedge funds, and investment banks. Research has shown that these investors can and do move the market due to the large amount of money they deal with, and thus, the market tends to move in the same direction as them.
In order to determine the fair value of a company and its shares, institutional investors design valuation models that focus on earnings and earnings estimates. Because if you raise earnings estimates, it then creates a higher fair value for a company and its stock price.
Institutional investors then act on these changes in earnings estimates, typically buying stocks with rising estimates and selling those with falling estimates; an increase in earnings estimates can translate into higher stock prices and bigger gains for the investor.
Retail investors who get in at the first sign of upward revisions have a distinct advantage over larger investors since it can often take weeks, if not months, for an institutional investor to build a position. They'll also benefit from the expected institutional buying that could 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 Thor Industries (THO), which was added to the Zacks Rank #1 list on June 29, 2021.
Founded in 1980, Indiana-based Thor Industries is the largest manufacturer of RVs in the world. The American company builds a variety of RVs in North America and Europe, and sells those vehicles along with related parts and accessories to independent, non-franchise dealers throughout the United States, Canada and Europe.
For fiscal 2021, five analysts revised their earnings estimate upwards in the last 60 days, and the Zacks Consensus Estimate has increased $0.90 to $10.45 per share. THO boasts an average earnings surprise of 45.9%.
Earnings are expected to grow 120.5% for the current fiscal year, while revenue is projected to increase 45.5%.
Additionally, THO has climbed higher over the past four weeks, gaining 4.1%. The S&P 500 is up 3.9% in comparison.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Thor Industries 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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