Identifying the Average Zacks Rank for an Industry

This week, I want to talk about how to use the Zacks Rank to identify the best Industries.

And since an Industry is nothing more that a group of stocks in the same business – finding those groups with the best average Zacks Rank will help pinpoint stocks from a group that should outperform.

This screen adds a unique tie-breaking element as well.

Parameters

Screening for the Best Industries based on the Zacks Rank is actually quite easy.

You would set it up in the Calculation Expression feature and it would look like this:

GrAgg117A(1*i192)

Then you choose the Operator: BotXIndA# 3

That means we're looking for the X Industries (Expanded Industries) with the Best Average Zacks Rank.

By saying "Bottom 3", we're looking for only the Best Three Industries. (Since a Zacks #1 Rank is better than a Zacks #5 Rank, we use the 'Bottom' operator since the number 1 is smaller that the number 5.)

The Best Three X Industries this week (week of 5/12/08) were:

1. Agricultural Operations -- Average Zacks Rank of 1.80
   
2. Fertilizers -- Average Zacks Rank of 1.86
   
3. Engines/Internal Combustion -- Average Zacks Rank of 2.00

Next, it's time to narrow down those Industries to find the best stocks within them.

Here is where the unique tie-breaker comes in.

If I ask for the best two stocks in each Industry based on the Zacks Rank, there may be many stocks that have a Zacks #1 Rank.

Since the Zacks Rank is an integer (whole number), you'll need a way to break a potential tie.

One way to do this is to multiply the Zacks Rank with another item such as the Price to Sales Ratio or the P/E ratio.

Since I'm looking for the best (i.e. the smallest Zacks Rank), I'll multiply it by a number where the smaller it is the better.

So I multiply the Zacks Rank of 1 by a P/E ratio – the stock with a 1 and the lower P/E ratio will be chosen. Why? Because 1 X 18 = 18 whereas 1 X 32.6 = 32.6.

The Zacks Rank with the smaller multiplier will be selected. This works equally well with other items too. As I mentioned earlier – Price to Sales, Price to Book etc.

But since you're looking for a small number – don't multiply the Zacks Rank by a growth rate, for example, or an item where the bigger number is better.

Why? Because a Zacks #1 Rank multiplied by a growth rate of 100% is bigger than a Zacks #1 Rank multiplied by a growth rate of 25%. So the result will be 100 vs. 25. But this will result in you getting the Zacks #1 Rank with the lower growth rate – probably not what you intended.

So multiply it by an item where the lower number is considered best.

The Zacks Rank multiplied the P/E ratio would look like this in the Calculation Expression feature:

i192 * i76

Then you would select the operator: Bot#InXInd 2

Again – the bottom number in this example would be the best.

Here is one stock from each of the Best Three Industries:

1. Agricultural Operations -- Average Zacks Rank of 1.80
   Best Stock: ( BG - Snapshot Report ) Bunge Ltd. –- value of 14.54

2. Fertilizers -- Average Zacks Rank of 1.86
   Best stock: ( CF - Analyst Report ) CF Industries Holdings, Inc. -- value of 17.11

3. Engines/Internal Combustion -- Average Zacks Rank of 2.00
   Best stock: ( CMI - Analyst Report ) Cummins Inc. -- value of 34.39

Many screeners won't let you screen for the Top Sectors or Industries. And even fewer will let you combine items together to make your own. But in the Research Wizard you can.

Picking winning stocks has never been so easy. And now you can do it too.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.