Building a successful investment portfolio takes skill and hard work, no matter if you’re a growth, value, income, or momentum-focused investor.
How do you find the right combination of stocks that will generate returns that could fund your retirement, or your kids’ college tuition, or your short- and long-term savings goals?
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.
Each factor is given a raw score, which is recalculated every night and compiled into the Zacks Rank. Utilizing this data, stocks are put into five different groups: Strong Buy, Buy, Hold, Sell, and 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.
These investors are known for designing valuation models that focus on earnings and earnings expectations in order to figure out the fair value of a company and its shares. If earnings estimates are raised, it puts a higher value on 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.
Since it can often take weeks, if not months, for an institutional investor to build a position (given their size), retail investors who get in at the first sign of upward earnings estimate 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 Zoom Video Communications (ZM), which was added to the Zacks Rank #1 list on June 5, 2021.
Zoom Video Communications’ cloud-native unified communications platform, which combines video, audio, phone, screen sharing and chat functionalities, makes remote-working and collaboration easy. Undoubtedly, the company is benefiting from the work-from-home and online learning wave following the coronavirus pandemic outbreak that forced more and more people to stay home.
For fiscal 2022, eight analysts revised their earnings estimate upwards in the last 60 days, and the Zacks Consensus Estimate has increased $0.99 to $4.66 per share. ZM boasts an average earnings surprise of 57.2%.
Earnings are forecasted to see growth of 39.5% for the current fiscal year, and sales are expected to increase 50.3%.
Even more impressive, ZM has gained in value over the past four weeks, up 13.7% compared to the S&P 500’s gain of 0%.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Zoom Video Communications 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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Zoom Video Communications, Inc. (ZM) : Free Stock Analysis Report
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