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The Zacks Rank Explained: How to Find Strong Buy Basic Materials Stocks

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Whether you're a growth, value, income, or momentum-focused investor, building a successful investment portfolio takes skill, research, and a little bit of luck.

How do you find the right combination of stocks that will generate returns that could fund your retirement, or your kids' college tuition, or your short- and long-term savings goals?

Enter the Zacks Rank.

What is the Zacks Rank?

The Zacks Rank, which is a unique, proprietary stock-rating model, employs earnings estimate revisions, or changes to a company's earnings expectations, that makes building a winning portfolio easier.

There are four main factors behind the Zacks Rank: Agreement, Magnitude, Upside, and Surprise.

Agreement is the extent to which all brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of analysts revising their estimates higher, the better chance the stock will outperform.

Magnitude is the size of the recent change in the consensus estimate for the current and next fiscal years.

Upside is the difference between the most accurate estimate, which is calculated by Zacks, and the consensus estimate.

Surprise is made up of a company's last few quarters' earnings per share surprises; companies with a positive earnings surprise are more likely to beat expectations in the future.

Each factor is given a raw score, which is recalculated every night and compiled into the Zacks Rank. Utilizing this data, stocks are put into five different groups: Strong Buy, Buy, Hold, Sell, and Strong Sell.

The Power of Institutional Investors

The Zacks Rank also allows individual investors, or retail investors, to benefit from the power of institutional investors.

Institutional investors are the professionals who manage the trillions of dollars invested in mutual funds, investment banks, and hedge funds. Studies have shown that these investors can and do move the market due to the large amounts of money they invest with. Because of this, the market tends to move in the same direction as institutional investors.

In order to determine the fair value of a company and its shares, institutional investors design valuation models that focus on earnings and earnings estimates. Because if you raise earnings estimates, it then creates a higher fair value for a company and its stock price.

Institutional investors will use these changes to help in their decision-making, typically buying stocks with rising estimates and selling those with falling estimates. Higher earnings expectations can translate into a rise in stock price and bigger gains for the investor.

Because it can take a long time for an institutional investor to build a position -- sometimes weeks, if not months -- retail investors who get in at the first sign of upward revisions have a distinct advantage over these larger investors, and can benefit from the expected institutional buying that will follow.

Not only can the Zacks Rank help you take advantage of trends in earnings estimate revisions, but it can also provide a way to get into stocks that are highly sought after by professionals.

How to Invest with the Zacks Rank

The Zacks Rank is known for transforming investment portfolios. In fact, a portfolio of Zacks Rank #1 (Strong Buy) stocks has beaten the market in 26 of the last 32 years, with an average annual return of +25.41%.

Moreover, stocks with a new #1 (Strong Buy) ranking have some of the biggest profit potential, while those that fell to a #4 (Sell) or #5 (Strong Sell) have some of the worst.

Let's take a look at Steel Dynamics (STLD - Free Report) , which was added to the Zacks Rank #1 list on April 22, 2021.

Based in Fort Wayne, IN, Steel Dynamics, Inc. is among the leading steel producers and metal recyclers in the United States. It currently has steelmaking and coating capacity of more than 11 million tons. It is one of the most diversified steel companies in United States with a vast range of specialty products. The company makes and markets steel products, processes and sells recycled ferrous and nonferrous metals, and fabricates and sells steel joist and decking products in the United States and internationally.

Two analysts revised their earnings estimate upwards in the last 60 days for fiscal 2021. The Zacks Consensus Estimate has increased $3.03 to $8.15 per share. STLD boasts an average earnings surprise of 10.5%.

Earnings are expected to grow 187% for the current fiscal year, while revenue is projected to increase 51.1%.

STLD has been moving higher over the past four weeks as well, up 25.1% compared to the S&P 500's loss of 0.6%.

Bottom Line

With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Steel Dynamics should be on investors' shortlist.

If you want even more information on the Zacks Ranks, or one of our many other investing strategies, check out the Zacks Education home page.

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