In good times or bad, stocks with rising earnings estimates have proven to beat the market. Simply put, the stocks most likely to outperform are the ones with earnings estimates that are being raised. And the ones most likely to underperform are the ones with earnings estimates that are being lowered.
The best way to take advantage of a rising market is to focus on the stocks with the best upward earnings estimate revisions.
And when the market goes down? It's even more important. When stocks are pulling back and fear grips the market, the best way to 'protect' yourself is to be even more diligent that the stocks you choose are indeed seeing their earnings estimates go up.
A rising tide raises all ships. And even mediocre stocks can see impressive price gains when the market is up. But when the market pulls back, the lower quality stocks, i.e., those with falling earnings estimate revisions, will likely be the first ones to get hit, and the last ones to bounce back, if they ever do.
The most effective way to find stocks with the best upward earnings estimates is to look for stocks with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).
On April 26th, 2013, Omnicare was upgraded to a Zacks Rank #2 (Buy) after posting a positive earnings surprise just two days before. OCR immediately began outperforming the market as more and more upward earnings estimate revisions rolled in after.
Even when the S&P started pulling back on news that the Fed was likely to begin QE tapering sooner rather than later, OCR's earnings estimates just kept on ratcheting up. And in turn, so did the stock price.
Shortly thereafter, their earnings estimates jumped even more, sending the stock price up even further. All in all, after being upgraded to a Zacks Rank #2, OCR saw their earnings estimates raised 11 consecutive times, even while the market was falling, to rack up a 15.49% gain vs. the S&P's 6.19%.
When earnings estimates go up, the fair value of that stock goes up. And each additional increase in earnings estimates means the stock, in theory, is worth that much more.
This is why, even in tough markets, stocks with the best upward earnings estimates outperform.
It should also be know that stocks receiving upward earnings estimate revisions tend to receive even more upward revisions. And studies have shown that those are the ones most likely to positively surprise.
So be sure this earnings season, whether the market goes up or down, to focus in on the stocks with a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) and put the odds of success in your favor like they never have been before.
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Disclosure: Performance information for Zacks portfolios and strategies are available at: https://www.zacks.com/performance.