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The Zacks Rank Explained: How to Find Strong Buy Basic Materials Stocks

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It doesn't matter if 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, 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 figure out the fair value of a company and its shares, these investors will build valuation models focused on earnings and earnings expectations. Because if you raise estimates for the bottom line, it creates a higher fair value for a company.

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 Mosaic (MOS), which was added to the Zacks Rank #1 list on August 7, 2021.

Minnesota-based The Mosaic Company is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. It was formed through the combination of the fertilizer businesses of agribusiness giant Cargill Incorporated and IMC Global Inc. Mosaic is the biggest integrated phosphate producer globally and is also among the four largest potash producers in the world.

Four analysts revised their earnings estimate higher in the last 60 days for fiscal 2021, while the Zacks Consensus Estimate has increased $1.22 to $4.36 per share. MOS also boasts an average earnings surprise of 43%.

Earnings are expected to grow 412.9% for the current fiscal year, while revenue is projected to increase 43.1%.

Even more impressive, MOS has gained in value over the past four weeks, up 7.5% compared to the S&P 500's gain of 1.7%.

Bottom Line

With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Mosaic 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.

Discover Today's Top Stocks

Our private Zacks #1 Rank List, based on our quantitative Zacks Rank stock-rating system, has more than doubled the S&P 500 since 1988. Applying the Zacks Rank in your own trading can boost your investing returns on your very next trade. See Today's Zacks #1 Rank List >>


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