OWhether you’re a growth, value, income or momentum investor, building a successful investment portfolio takes skill, research and a bit of luck.
How do you find the right combination of stocks that will generate returns that could fund your retirement, your children’s school fees, or your short- and long-term savings goals?
Enter the Zacks rank.
What is Zacks Rank?
The Zacks Rank is a proprietary, proprietary stock rating model that uses earnings estimate revisions to help investors 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.
Each of these factors receives a raw score which is recalculated each night and then compiled into the Zacks Ranking. Using this data, stocks are classified into five groups, 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.
Institutional investors will use these changes to aid in their decision-making, typically buying stocks with rising estimates and selling those with falling estimates. Higher earnings expectations can translate into a higher stock price and greater gains for the investor.
Retail investors who enter at the first sign of upside revisions have a distinct advantage over large investors, as it can often take weeks or even months for an institutional investor to build a position. They will also benefit from the expected institutional purchases that may 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 Nvidia (NVDA)which was added to the Zacks Rank #1 list on March 29, 2022.
NVIDIA Corporation is the world leader in visual computing technology and the inventor of the graphics processing unit, or GPU. Over the years, the company’s focus has shifted from PC graphics to artificial intelligence (AI)-based solutions that now support high-performance computing (HPC), gaming and virtual reality (VR).
12 analysts have revised upward their earnings estimate over the past 60 days for fiscal year 2023. Zacks’ consensus estimate rose $0.39 to $5.55 per share. NVDA has an average earnings surprise of 7%.
Profits are expected to increase by 25% for the current fiscal year, while revenues are expected to increase by 28.2%.
NVDA has also risen over the past four weeks, up 22.1% from the S&P 500’s 6% gain.
With a #1 ranking (Strong Buy), a positive trend in earnings estimate revisions, and strong market momentum, Nvidia 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.