Whether you’re a growth, value, income, or momentum investor, building a successful investment portfolio takes skill, research, and a bit of luck.
But how do you find the right combination of shares? Funding your retirement, your children’s college tuition, or your short- and long-term savings goals surely requires significant returns.
Enter the Zacks rank.
What is Zacks Rank?
The Zacks Rank, a unique, proprietary stock valuation model, uses revisions to earnings estimates or changes in a company’s earnings expectations, making it easier to build a successful portfolio.
There are four main factors behind Zacks rank: consistency, size, uptrend, and surprise.
Consensus is the extent to which all brokerage analysts are revising their earnings estimates in the same direction. The larger the percentage of analysts that revise their estimates upward, the better the chance that the stock will outperform.
The magnitude is the size of the most recent change in the consensus estimate for the current and next fiscal year.
Positive is the difference between the most accurate estimate computed by Zacks and the consensus estimate.
The surprise consists of a company’s earnings per share surprises over the past few quarters; Companies with a positive earnings surprise are more likely to exceed expectations going forward.
Each of these factors receive a raw score that is recalculated each night and then compiled into the Zacks rank. This data is used to classify stocks into five groups ranging from “Strong Buy” to “Strong Sell”.
The power of institutional investors
The Zacks Rank also allows individual 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 because of the large amounts of money they invest with. Because of this, the market tends to move in the same direction as institutional investors.
These investors are known for developing valuation models that focus on earnings and earnings expectations to determine the fair value of a company and its stock. When earnings estimates are raised, a company is valued higher.
Given these changes, institutional investors will trade, typically buying stocks with rising valuations and selling those with falling valuations. An increase in earnings expectations can potentially lead to higher stock prices and greater profits for the investor.
Retail investors who jump in at the first sign of upward corrections have a distinct advantage over larger investors, as it can often take weeks, if not months, for an institutional investor to establish a position. They will also benefit from the expected institutional buying that could follow.
Not only can 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 outperformed the market for 26 of the last 32 years with a compound annual return of +25.41%.
Additionally, stocks that rerank at No. 1 (Strong Buy) have some of the best odds, while those that fell to No. 4 (Sell) or No. 5 (Strong Sell) have some of the worst.
Let’s take a look Paccar (PCAR – free report) which entered the Zacks Rank #1 list on November 23, 2022.
PACCAR Inc., headquartered in Bellevue, WA, is a leading global manufacturer of heavy-duty trucks and has a significant manufacturing commitment in light- and medium-duty trucks. It also designs and manufactures diesel engines and other powertrain components for use in its own products and for sale Third-party truck and bus manufacturers. In addition to supplying aftermarket parts, PACCAR also offers financing and leasing services.
For fiscal 2022, eight analysts have revised upwards their earnings estimate over the past 60 days, and the Zacks Consensus estimate is up $0.42 to $8.15 per share. PCAR has an average earnings surprise of 12.6%.
Earnings growth of 53.2% and sales growth of 21.6% are forecast for the current financial year.
Even more impressively, PCAR is up 15.6% over the past four weeks, compared to the S&P 500’s 6.9% gain.
With a #1 ranking (Strong Buy), a positive trend in earnings estimate revisions, and strong market momentum, Paccar should be on investors’ shortlist.
If you would like more information about the Zacks Ranks or any of our many other investment strategies, visit the Zacks Education home page.
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Our private Zacks #1 ranking, based on our quantitative Zacks Rank stock rating system, has more than doubled the S&P 500 since 1988. Using Zacks rank in your own trading can increase your investment returns on your next trade. Check out today’s #1 Zacks rankings >>