When investing in stocks, businesses are categorized into groups called “sectors” and subcategorized into groups named “industries”. Sectors are defined by Investopedia as “an area of the economy in which businesses share the same or a related product or service. Also, Investopedia sees industries as “a classification that refers to groups of companies that are related based on their primary business activities”.

So, the difference between sectors and industries is that sectors are an umbrella category and industries are found within sectors. For example, Foot Locker (FL Quick QuoteFL - Free Report) is a publicly traded sportswear company. They belong to the Retail and Wholesale sector and are, specifically, within the Retail – Apparel and Shoes industry.

That’s great and all, but why should you care? It’s because sectors and industries are utilized by investors in finding investment opportunities. Since stocks within sectors and industries are similar, they probably move together. As a result, sectors and industries can be benched against each other to see which businesses in the stock market are doing better than others.

To show the importance of sectors and industries, let’s take a look at the performance of the top 50% of Zacks Sector Rank. Seen below, with weekly rebalance, from 2006 to 2015 the top 50% of Zacks Sector Rank outperformed the bottom 50% by two-fold. Sector and industry activity is impactful when considering outperformance.

A Live Example: How to Read and Utilize Sector & Industry Activity

Activity of sectors and industries can be read through heat maps, seen below. This service is available through Zacks Premium: start your free trial now.

What is seen here are sector names in the left-hand column with their respective sector ranks, going back two months, colored to the right. In parentheses, next to the sector names, represents the number of stocks in that sector. Regarding heat colors, the lighter the green the better the sector rank (lower numbers) and the darker the red the worse the sector rank (higher numbers). By toggling the heat map, Zacks Premium users can shift around the heat map to find different patterns.

For example, the “Retail and Wholesale” sector in dark red holds a Zacks Sector Rank #16 as of March 18, 2017. If we look back on the past two months, the retail and wholesale sector has consistently held a poor sector rank as it has floated between a dark red Zacks Sector Rank #15 and #16. To toggle the menu, if I were interested in only looking for poorly ranked sectors, I can click on “3/18/2017” which will organize sector ratings bottom to top for March 18, 2017. That image is pictured below. As you can see, it is flipped from the first image of the sector heat map.

Left of the sector name is a “+”; when clicking on the symbol, a pull-down menu loads, pictured below, which reveals industries within the sector. Again, looking at the retail and wholesale sector, we can now see all the industries within it. Like the sector rank heat map, the industry names within the retail and wholesale sector are listed in the left-hand column under their sector name, with the number of stocks in the industry in parentheses. Each industry’s Zacks Industry Rank is posted to the right of the industry name, in color, going two months back. Just as the sector rank heat map showed, the lighter the green the better the industry rank (lower numbers) and the darker the red the worse the industry rank (higher numbers).

We can see that many of the industries within the retail and wholesale sector have been downgraded in the past two months; as industries are downgraded, so are their sectors.

For example, the “Retail – Miscellaneous” industry within the retail and wholesale sector has 21 stocks in it, and it moved from a Zacks Industry Rank #133 to a Zacks Industry Rank #232 in the most recent two-month period. As a result, stocks in that industry should probably be steered away from.

Zacks Sector Rank and Zacks Industry Rank shows that retail stocks should have probably been avoided in the past two months. Was it right? Yes! Below, you’ll find the performance of the S&P Retail Select Index , which tracks retail stocks; the graph is provided by Google Finance. In the past three months, the index is down 7%.

In summary, we looked at how to utilize and read Zacks Premium’s sector and industry heat maps. From these tools, commonly used by investors, we were able to deduce in an organized and simple manner that the retail – miscellaneous industry should probably be avoided in the retail and wholesale sector. And what do you know? The sector performance of the heat map shows exactly what happened in the market.

Where Do These Rankings Come From?

Zacks Sector Rank and Zacks Industry Rank boil down to Zacks Rank; I know, I know--so many ranks! Let me clear the confusion for you. We are talking about three different ranking systems here: Zacks Sector Rank, which ranks sectors; Zacks Industry Rank, which ranks industries; and Zacks Rank, which ranks stocks.

Zacks Rank is a stock rating system which has had an average yearly gain of 26% and has tripled the S&P 500 since 1988. These performance numbers are validated by independent accounting firm Baker Tilly Virchow Krouse, LLP. 

The ranking system concerns the power of earnings revision estimates. As estimate revisions for companies increase, its Zacks Rank, which is between #1 (Strong Buy) to #5 (Strong Sell), is upgraded. For more, please utilize Zacks Rank Education Home for free article and video resources.

So, Zacks Rank is the underlying rating system behind Zacks Sector Rank and Zacks Industry Rank. Zacks Sector Ranking is calculated by calculating the average Zacks Rank of all the stocks in the sector. Once calculated, an ordinal value is assigned to the sector.

Conclusion

Using sectors and industries to find great stocks is a simple process; it’s a way to find the best segments in any market conditions. Heat maps, available through Zacks Premium, make sector and industry analysis easy. To get started, being your free trial now.