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Building a successful investment portfolio takes skill and hard work, no matter if you're a growth, value, income, or momentum-focused investor.
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, which is a unique, proprietary stock-rating model, employs earnings estimate revisions, or changes to a company's earnings expectations, that makes building a winning portfolio easier.
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 the professionals who manage the trillions of dollars invested in mutual funds, investment banks, and hedge funds. Studies have shown that these investors can and do move the market due to the large amounts of money they invest with. Because of this, 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 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.
With these changes, institutional investors will act, usually buying stocks with rising estimates and selling those with falling estimates. An increase in earnings expectations can potentially lead to higher stock prices 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 CarMax (KMX), which was added to the Zacks Rank #1 list on September 11, 2021.
Headquartered in Richmond, VA, CarMax Inc. operates as a specialty retailer of used and new vehicles. The range of vehicles includes both cars and light trucks. It is one of the largest retailers of used vehicles in the United States. CarMax also provides customers with a full range of related services including financing of vehicle purchases and sale of extended warranties, accessories and vehicle repair services through CarMax Auto Finance (CAF).
For fiscal 2022, four analysts revised their earnings estimate upwards in the last 60 days, and the Zacks Consensus Estimate has increased $0.76 to $7.49 per share. KMX boasts an average earnings surprise of 41.9%.
Earnings are expected to grow 65.7% for the current fiscal year, while revenue is projected to increase 39.5%.
Additionally, KMX has climbed higher over the past four weeks, gaining 5%. The S&P 500 is up 0.7% in comparison.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, CarMax 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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CarMax, Inc. (KMX) : Free Stock Analysis Report
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