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The Zacks Ranking system is designed to identify how a stock is expected to move over a 1-3 month time frame.  Specifically, a company that receives the coveted Rank #1 (Strong Buy) rating has a demonstrable history of outperforming the markets over that time period, and only 5% of the Zacks Rank universe earns this rating.  But the system not only helps you identify these companies, it enables the investor to stay in the stock while it continues to appreciate in value.

The example below, shows how the system identified a small cap computer networking company, and how it kept the investor in the stock as it gained an almost +100% return in 9 months.  

Example Extreme Networks (EXTR - Free Report)

Extreme Networks (EXTR - Free Report) is a leading provider of a next generation of switching solutions that meet the increasing needs of enterprise local area networks internet service providers and content providers. The key advantages of its Layer 3 switching solutions are increased performance, the ability to easily grow in size as customer needs change, flexible allocation of network resources, ease of use and lower cost of ownership. These advantages are obtained through the use of custom semiconductors, known as ASICs, in its products and through hardware and software designs.

On April 7th 2017, Extreme Networks became a Zacks Rank #1 (Strong Buy) just after it announced that they were purchasing Brocade Communication’s data center network assets for $55 million.  Management commented that they saw the acquisition generating about $230 million from the new assets, and that it would generate gross margins of at least 60%.  After the closing bell, EXTR was trading at $6.98 on April 7th.

On May 3rd, the company posted Q3 17 results where they tripled the Zacks consensus earnings estimate, and revenues were up +19% YoY with gross margins of +55.3%.  The company attributed the successful quarter to the integration of its recent acquisitions, and quality consumer solutions.  Three months after becoming a Zacks Rank #1 pick, the stock price improved by +33.4% to $9.31.  

Going into the company’s Q4 17 earnings announcement, they were once again holding a Zacks Rank #1 (Strong Buy) rating, and they did not disappoint.  The company beat both top and bottom line expectations with revenues jumping up another +28% YoY, and gross margins improving to +56.9%.  Further, management increased both earnings and revenue guidance for Q1 18 due to the continued success of the company.  Six months after becoming a Zacks Rank #1, the stock price was up +78.7%, to $12.47.

Even with high expectations, the company easily beat both the Zacks consensus earnings and revenue estimates for its Q1 18 report.  Revenues jumped up an astounding +73% YoY, while gross margins came in at +53.1%.  Management once again increased revenue expectations for the upcoming quarter due to its acquisition integration.  Extreme Networks was once again a Zacks Rank #1.  As of the close of the bell on January 22nd, the stock price was up +97.1%, to $13.76.

The table below shows the price performance of EXTR (in green), and the 12 month forward looking EPS estimate (in red) from when it became a Zacks Rank #1 till the close of the bell January 22nd.

Overall, by utilizing the Zacks Ranking system, you can easily identify the elite stocks which are best positioned to beat the market on a consistent basis, and how to stay in those top stocks as they continue to grow.  

Note:  Brian Bolan, editor of Stocks Under $10, purchased Extreme Networks for the service on November 25, 2016 when the company was a Zacks Rank #1, and the stock price has gained +233.7% since he added it to the portfolio.

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