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Looking for Retail and Wholesale Stocks? The Zacks Rank Can Help You Find Winners

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It doesn't matter if 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.

These four factors are assigned a raw score that's recalculated every night, which is then compiled into the ranking system. Stocks are classified into five groups using this data, ranging from "Strong Buy" to "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 figure out the fair value of a company and its shares, these investors will build valuation models focused on earnings and earnings expectations. Because if you raise estimates for the bottom line, it creates a higher fair value for a company.

Institutional investors then act on these changes in earnings estimates, typically buying stocks with rising estimates and selling those with falling estimates; an increase in earnings estimates can translate into higher stock prices 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 Group 1 Automotive (GPI - Free Report) , which was added to the Zacks Rank #1 list on July 13, 2021.

Group 1 Automotive, Inc. is one of the leading automotive retailers in the world, with operations primarily located in the United States, UK and Brazil. As of Dec 31, 2020, the company's retail network consisted of 117, 50 and 17 dealerships in the United States, U.K. and Brazil, respectively. Through these dealerships, the firm sells new and used cars and light trucks. Apart from selling new and used vehicles, the company offers vehicle financing and insurance and service contracts. Further, it provides maintenance and repair services, along with sale of replacement parts and aftermarket automotive products.

For fiscal 2021, four analysts revised their earnings estimate upwards in the last 60 days, and the Zacks Consensus Estimate has increased $6.85 to $27.27 per share. GPI boasts an average earnings surprise of 86.1%.

Earnings are expected to grow 51% for the current fiscal year, while revenue is projected to increase 21.4%.

GPI has been moving higher over the past four weeks as well, up 6.8% compared to the S&P 500's gain of 2.6%.

Bottom Line

With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Group 1 Automotive 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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