Why a Stock May Lose Its #1 Rank
The Zacks Rank is a timeliness indicator that is assigned in constant proportions across the coverage universe. Only 5% of stocks can have a Zacks #1 Rank Strong Buy rating at any given time. Furthermore, the Zacks Rank is calculated on a daily basis, to ensure the most current information is evaluated. This combination of exclusivity and constant updates means that a stock can lose its #1 Rank.
Most investors understand why negative estimate revisions will lower the Zacks Rank of a stock. However, it is not so obvious why a company with positive estimate revisions may lose its #1 ranking. The key to understanding this concept is to realize that the Zacks Rank is a relative indicator. A stock''s rank is determined by how it compares to all other stocks in the Zacks Rank universe. This comparison is based on both the size and timing of Earnings Estimate Revisions. Specifically, a stock's Zack Rank can change based on any of the following factors:
- More positive revisions to other stocks - Remember that only 5% of stocks can have a Zacks Rank of #1 at any given time (approximately 220 stocks). Let's say that yesterday stock XYZ had a Zacks Rank of #1. If today there are 220 or more stocks with stronger earnings estimate revisions, then XYZ will be bumped from its #1 standing and become a #2 Rank stock. Note that a Zacks Rank of #2 is still a Buy that has historically outperformed the market.
- Timeliness of Data - two of the four factors used to calculate the Zacks Rank employ a 60-day window to review changes in estimates (Agreement and Magnitude). Suppose that analysts revise their earnings estimates for stock XYZ and the consensus moves up from $1.00 to $1.20 per share. The Magnitude piece of the equation would show a positive revision of 20% when comparing the current estimate to the estimate from 60 days ago. This will most likely prompt the stock to rise to a Zacks Rank of #1. If no other revisions are made over the next two months, then the current and 60-day old consensus will both read $1.20 per share, which equals no change in Magnitude. This, in turn, should lower a stock''s rank, especially if estimates are being revised upwards for other stocks.
- No Earnings Surprise - If a company meets expectations then it will not score very high on the Surprise element of the Zacks Rank. Although meeting estimates is something shareholders should be pleased about, merely reporting earnings that are inline with forecasts often is not enough to sustain a Zacks Rank of #1 or #2. This is particularly the case if there are multiple other companies that are exceeding earnings expectations.
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Zacks Rank Guide Table of Contents
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