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A Winning Stock Selection Process to Be Thankful For
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“If you are really thankful, what do you do? You share.” – W. Clement Stone
The major U.S. indices remain in the midst of a staggering November rally as we head into the Thanksgiving holiday. From the October lows, the Dow is up more than 8%, the S&P 500 has risen more than 10%, and the tech-heavy Nasdaq has climbed more than 13%. The lockout move has caught many investors off guard.
Sector rotation has been on full display this year, as market participants have shifted back into aggressive sectors such as information technology and consumer discretionary. This is a healthy sign that this new bull market can be sustained as market breadth broadens out.
Throughout the year, we here at Zacks have emphasized the bullish tailwinds that are helping to fuel this market rally. Positive seasonality is underway, earnings have come in above expectations, and bond yields have now begun to decline. Decelerating inflation is the biggest theme in my opinion, and recent inflation reports have confirmed the downtrend from the peaks of last year.
Looking ahead, the month of December is bullish in pre-election years; since 1950, the final month of the year has been positive more than 72% of the time with an average return of 2.9%.
With positive market performance in full swing, let’s review a stock selection process that has consistently identified leading stocks.
Zacks Industry Rank: Improve Your Stock-Picking Success
Zacks Investment Research employs several proprietary methodologies to make it easier for investors to detect top stocks at any given point in time. One such method is the Zacks Industry Rank, which is a great starting point to begin building out your portfolio. Using this investment tactic, we’ll start with a leading industry group in the current market environment.
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.
Our industry ranking system sorts companies into more than 250 industry groups. The Zacks Industry Rank is calculated by averaging the Zacks Rank for all individual stocks within a specific industry. A recent 10-year backtest has shown that stocks within the top 50% of all Zacks Ranked Industries outperformed the bottom half by a factor of more than 2 to 1.
Let’s take a look at an example. The Zacks Computers – IT Services industry currently ranks in the top 23% out of more than 250 Zacks Ranked Industries. We’ll start with this industry group that has been significantly outperforming the market over the last 3 months:
Image Source: Zacks Investment Research
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 filter our investment list and select stocks with the best profit potential.
Narrow Down the Investment Universe with the Zacks Rank
Once the top industry groups are identified, we can peel back the curtain to find stocks with the highest Zacks Rank. Stocks with rising earnings estimate revisions have significantly outperformed the S&P 500 year after year. This ranking system uses five different ranks: #1 (Strong Buy), #2 (Buy), #3 (Hold), #4 (Sell), and #5 (Strong Sell).
Our top-down process narrows the investable universe, starting with the Zacks Computers – IT Services industry (top 23%). Let’s dive deeper into a leading Zacks Rank #2 (Buy) stock contained within this top industry.
Dell Technologies (DELL - Free Report) is one of the largest providers of information technology solutions. The company offers a variety of electronics including desktops, workstations, notebooks, monitors, and storage solutions.
As we can see below, Dell boasts the a solid Zacks Rank due to positive earnings estimate revisions. The company has surpassed earnings estimates in each of the past four quarters, delivering a 39.5% average earnings surprise over that timeframe. Analysts covering DELL have increased their EPS estimates for the next fiscal year by 2.34% in the past 60 days. The Zacks Consensus Estimate now stands at $6.99/share, which would mark a 10.5% improvement relative to this year.
Image Source: Zacks Investment Research
Select Stocks Showing Relative Strength
We want to look for stocks that are breaking out to the upside and are experiencing high levels of buying pressure. These companies held up well through the Fall correction and are leading the way in this next leg up.
DELL fits the bill as the stock remains in a strong uptrend and has made a series of 52-week highs. DELL shares have widely outperformed the market this year with a 92% return:
Image Source: StockCharts
Employing a top-down approach utilizing the various Zacks Ranking systems can help investors find leading stocks like DELL more easily. Trading currently undervalued at just an 11.64 forward P/E, Dell appears well-positioned to extend its recent gains. As we head into the Thanksgiving holiday, be sure to take advantage of all that Zacks has to offer.
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A Winning Stock Selection Process to Be Thankful For
“If you are really thankful, what do you do? You share.” – W. Clement Stone
The major U.S. indices remain in the midst of a staggering November rally as we head into the Thanksgiving holiday. From the October lows, the Dow is up more than 8%, the S&P 500 has risen more than 10%, and the tech-heavy Nasdaq has climbed more than 13%. The lockout move has caught many investors off guard.
Sector rotation has been on full display this year, as market participants have shifted back into aggressive sectors such as information technology and consumer discretionary. This is a healthy sign that this new bull market can be sustained as market breadth broadens out.
Throughout the year, we here at Zacks have emphasized the bullish tailwinds that are helping to fuel this market rally. Positive seasonality is underway, earnings have come in above expectations, and bond yields have now begun to decline. Decelerating inflation is the biggest theme in my opinion, and recent inflation reports have confirmed the downtrend from the peaks of last year.
Looking ahead, the month of December is bullish in pre-election years; since 1950, the final month of the year has been positive more than 72% of the time with an average return of 2.9%.
With positive market performance in full swing, let’s review a stock selection process that has consistently identified leading stocks.
Zacks Industry Rank: Improve Your Stock-Picking Success
Zacks Investment Research employs several proprietary methodologies to make it easier for investors to detect top stocks at any given point in time. One such method is the Zacks Industry Rank, which is a great starting point to begin building out your portfolio. Using this investment tactic, we’ll start with a leading industry group in the current market environment.
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.
Our industry ranking system sorts companies into more than 250 industry groups. The Zacks Industry Rank is calculated by averaging the Zacks Rank for all individual stocks within a specific industry. A recent 10-year backtest has shown that stocks within the top 50% of all Zacks Ranked Industries outperformed the bottom half by a factor of more than 2 to 1.
Let’s take a look at an example. The Zacks Computers – IT Services industry currently ranks in the top 23% out of more than 250 Zacks Ranked Industries. We’ll start with this industry group that has been significantly outperforming the market over the last 3 months:
Image Source: Zacks Investment Research
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 filter our investment list and select stocks with the best profit potential.
Narrow Down the Investment Universe with the Zacks Rank
Once the top industry groups are identified, we can peel back the curtain to find stocks with the highest Zacks Rank. Stocks with rising earnings estimate revisions have significantly outperformed the S&P 500 year after year. This ranking system uses five different ranks: #1 (Strong Buy), #2 (Buy), #3 (Hold), #4 (Sell), and #5 (Strong Sell).
Our top-down process narrows the investable universe, starting with the Zacks Computers – IT Services industry (top 23%). Let’s dive deeper into a leading Zacks Rank #2 (Buy) stock contained within this top industry.
Dell Technologies (DELL - Free Report) is one of the largest providers of information technology solutions. The company offers a variety of electronics including desktops, workstations, notebooks, monitors, and storage solutions.
As we can see below, Dell boasts the a solid Zacks Rank due to positive earnings estimate revisions. The company has surpassed earnings estimates in each of the past four quarters, delivering a 39.5% average earnings surprise over that timeframe. Analysts covering DELL have increased their EPS estimates for the next fiscal year by 2.34% in the past 60 days. The Zacks Consensus Estimate now stands at $6.99/share, which would mark a 10.5% improvement relative to this year.
Image Source: Zacks Investment Research
Select Stocks Showing Relative Strength
We want to look for stocks that are breaking out to the upside and are experiencing high levels of buying pressure. These companies held up well through the Fall correction and are leading the way in this next leg up.
DELL fits the bill as the stock remains in a strong uptrend and has made a series of 52-week highs. DELL shares have widely outperformed the market this year with a 92% return:
Image Source: StockCharts
Employing a top-down approach utilizing the various Zacks Ranking systems can help investors find leading stocks like DELL more easily. Trading currently undervalued at just an 11.64 forward P/E, Dell appears well-positioned to extend its recent gains. As we head into the Thanksgiving holiday, be sure to take advantage of all that Zacks has to offer.