OWhether you’re a growth, value, income or momentum investor, building a successful investment portfolio takes skill, research and a little luck.
But what is the best way to find the right combination of actions? Because funding things like your retirement, your kids’ tuition, or your short and long-term savings goals will definitely require big returns.
Enter the Zacks rank.
What is Zacks Rank?
The Zacks Ranking, which is a unique and proprietary stock rating model, uses earnings estimate revisions or changes to a company’s earnings forecast, making it easier to build a winning portfolio.
There are four main factors behind the Zacks rank: Accord, Magnitude, Upside, and Surprise.
Agreement is the extent to which all brokerage analysts revise their earnings estimates in the same direction. The higher the percentage of analysts revising their estimates upwards, the more likely the stock is to outperform.
The magnitude is the size of the recent change in the consensus estimate for the current year and the next year.
The advantage is the difference between the most accurate estimate, which is calculated by Zacks, and the consensus estimate.
The surprise is made up of a company’s earnings per share surprises in recent quarters; companies with a positive earnings surprise are more likely to exceed expectations in the future.
These four factors are assigned a raw score which is recalculated each 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 retail investors, or individual 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 move the market due to the large sums of money with which they invest. Thus, the market tends to move in the same direction as institutional investors.
In order to determine the fair value of a company and its stock, these investors will build valuation models based on earnings and earnings expectations. Because if you increase net income estimates, it creates a higher fair value for a business.
With these changes, institutional investors will act, typically buying stocks with rising estimates and selling those with falling estimates. An increase in earnings expectations can potentially lead to higher stock prices and greater gains for the investor.
Because it can take an institutional investor a long time to build a position – sometimes weeks or even months – retail investors who enter at the first sign of upside revisions have a distinct advantage over these larger investors and can benefit of the planned institutional purchase that will follow.
Not only can the Zacks Rankings help you take advantage of trends in earnings estimate revisions, it can also provide a way to access stocks that are highly sought after by professionals.
How to Invest with 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 past 32 years, with an average annual return of +25.41%.
Additionally, stocks with a new #1 (strong buy) ranking have one of the highest profit potentials, while those that have fallen to a #4 (sell) or #5 (strong sell) have one of the worst.
Let’s take a look at Cirrus Logic (CRUS)which was added to the Zacks Rank #1 list on February 2, 2022.
Based in Austin, TX, Cirrus Logic is a fabless semiconductor supplier that develops, manufactures and markets analog, mixed-signal and audio DSP integrated circuits.
For fiscal 2022, six analysts have raised their earnings estimate over the past 60 days, and Zacks’ consensus estimate rose $0.94 to $6.31 per share. CRUS has an average earnings surprise of 16%.
Profits are expected to grow by 37.8% for the current fiscal year and sales are expected to increase by 25%.
Additionally, CRUS has climbed higher over the past four weeks, gaining 2.3%. The S&P 500 is down 3.9% in comparison.
With a #1 ranking (Strong Buy), a positive trend in earnings estimate revisions, and strong market momentum, Cirrus Logic should be on the shortlist for investors.
If you want even more information about Zacks Rankings or any of our many other investment strategies, check out the Zacks Education homepage.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.