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2023 is set to be a rebound year for investors as stocks look to regain lost ground from last year’s bear market. While countless worries remain in the present investment landscape including inflationary pressures, rising interest rates, and a declining earnings picture, the market is forward-looking and has already moved past much of the downside associated with these concerns.
There aren’t many stocks that have consistently outperformed the market in both bullish and bearish settings. Knowing that this year has a relatively high probability of being a positive year for stocks (given that two consecutive negative years is historically unlikely), how do we as investors go about picking stocks in this type of environment?
The first step is to identify leading industry groups. Quantitative research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. Focusing on stocks within the top-performing industries provides a constant tailwind to our investing results. Including this step in our selection process also allows us to narrow down the investment universe and select stocks with the best profit potential.
The length of time that industry groups remain at the top can vary from a few months to many years – it ultimately depends on the market environment. The top-performing industry groups are constantly changing, so investors would be wise to stay abreast of these groups. The stocks within these industries will typically be leading the market, and it is these stocks that we want to target for additions to our portfolio.
Fortunately for investors, we here at Zacks provide you with a proprietary industry group ranking system called the Zacks Industry Rank. This system harnesses the power of the Zacks Rank, meaning that the top-ranked industries contain more stocks that are receiving upward earnings estimate revisions. Simply put, your most profitable stocks will be those with upward earnings estimate revisions in the industries enjoying the same.
Targeting the top Zacks Ranked Industries is a great starting point to begin building out your portfolio. Let’s take a look at an example of an industry group that is outperforming in the current market environment and whose constituents are receiving positive earnings estimate revisions.
The Zacks Food-Confectionery industry is currently ranked in the top 14% of all industry groups. More specifically, this group is ranked #36 out of all 251 industries. Below we will examine a proven market leader that is part of this leading industry group.
The Hershey Company is a global confectionery leader, providing items such as chocolate, sweets, mints and other snacks. HSY offers its products under well-known brands such as Hershey’s, Reese’s, Jolly Rancher, and Kit Kat. The company markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, vending companies, and drug and convenience stores. HSY was founded in 1894 and is based out of Hershey, PA.
HSY reported stellar quarterly results earlier this month. The well-known sweets maker produced fourth-quarter earnings of $2.02/share, which translated to a 13.48% surprise over consensus estimates and a 19.5% year-over-year increase. Solid consumer demand for its brands contributed to the upbeat performance. HSY’s market share has remained above pre-pandemic levels, and the company expects adjusted earnings growth in a band of 9-11% on the heels of solid 6-8% sales growth in 2023.
Image Source: Zacks Investment Research
HSY has posted an average earnings surprise of 11.33% over the past four quarters. The stock has been outperforming during the past year, delivering investors a 21.5% gain over that time frame.
Image Source: Zacks Investment Research
Looking ahead, analysts covering HSY have increased earnings estimates across the board. For the first quarter, analysts have raised estimates by 0.38% in the past 60 days. The Q1 Zacks Consensus Estimate now stands at $2.66/share, reflecting growth of 5.14% relative to the same quarter in the prior year.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to identify companies that have recently witnessed positive earnings estimate revision activity. This proprietary Zacks technique has been very useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.
HSY, currently a Zacks #1 (Strong Buy) stock, has a positive Earnings ESP (+0.45%). Another earnings beat may be in the cards the company reports Q1 results on April 27th.
Disclaimer: The Zacks Income Investor portfolio holds a long-term position in Hershey stock.
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A Proven Market Leader - In Good Times and Bad
2023 is set to be a rebound year for investors as stocks look to regain lost ground from last year’s bear market. While countless worries remain in the present investment landscape including inflationary pressures, rising interest rates, and a declining earnings picture, the market is forward-looking and has already moved past much of the downside associated with these concerns.
There aren’t many stocks that have consistently outperformed the market in both bullish and bearish settings. Knowing that this year has a relatively high probability of being a positive year for stocks (given that two consecutive negative years is historically unlikely), how do we as investors go about picking stocks in this type of environment?
The first step is to identify leading industry groups. Quantitative research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. Focusing on stocks within the top-performing industries provides a constant tailwind to our investing results. Including this step in our selection process also allows us to narrow down the investment universe and select stocks with the best profit potential.
The length of time that industry groups remain at the top can vary from a few months to many years – it ultimately depends on the market environment. The top-performing industry groups are constantly changing, so investors would be wise to stay abreast of these groups. The stocks within these industries will typically be leading the market, and it is these stocks that we want to target for additions to our portfolio.
Fortunately for investors, we here at Zacks provide you with a proprietary industry group ranking system called the Zacks Industry Rank. This system harnesses the power of the Zacks Rank, meaning that the top-ranked industries contain more stocks that are receiving upward earnings estimate revisions. Simply put, your most profitable stocks will be those with upward earnings estimate revisions in the industries enjoying the same.
Targeting the top Zacks Ranked Industries is a great starting point to begin building out your portfolio. Let’s take a look at an example of an industry group that is outperforming in the current market environment and whose constituents are receiving positive earnings estimate revisions.
The Zacks Food-Confectionery industry is currently ranked in the top 14% of all industry groups. More specifically, this group is ranked #36 out of all 251 industries. Below we will examine a proven market leader that is part of this leading industry group.
The Hershey Company (HSY - Free Report)
The Hershey Company is a global confectionery leader, providing items such as chocolate, sweets, mints and other snacks. HSY offers its products under well-known brands such as Hershey’s, Reese’s, Jolly Rancher, and Kit Kat. The company markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, vending companies, and drug and convenience stores. HSY was founded in 1894 and is based out of Hershey, PA.
HSY reported stellar quarterly results earlier this month. The well-known sweets maker produced fourth-quarter earnings of $2.02/share, which translated to a 13.48% surprise over consensus estimates and a 19.5% year-over-year increase. Solid consumer demand for its brands contributed to the upbeat performance. HSY’s market share has remained above pre-pandemic levels, and the company expects adjusted earnings growth in a band of 9-11% on the heels of solid 6-8% sales growth in 2023.
Image Source: Zacks Investment Research
HSY has posted an average earnings surprise of 11.33% over the past four quarters. The stock has been outperforming during the past year, delivering investors a 21.5% gain over that time frame.
Image Source: Zacks Investment Research
Looking ahead, analysts covering HSY have increased earnings estimates across the board. For the first quarter, analysts have raised estimates by 0.38% in the past 60 days. The Q1 Zacks Consensus Estimate now stands at $2.66/share, reflecting growth of 5.14% relative to the same quarter in the prior year.
Image Source: Zacks Investment Research
What the Zacks Model Unveils
The Zacks Earnings ESP (Expected Surprise Prediction) seeks to identify companies that have recently witnessed positive earnings estimate revision activity. This proprietary Zacks technique has been very useful for finding positive earnings surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.
HSY, currently a Zacks #1 (Strong Buy) stock, has a positive Earnings ESP (+0.45%). Another earnings beat may be in the cards the company reports Q1 results on April 27th.
Disclaimer: The Zacks Income Investor portfolio holds a long-term position in Hershey stock.