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.
But how do you find the right combination of stocks? Funding your retirement, your kids' college tuition, or your short- and long-term savings goals certainly requires significant returns.
Enter the Zacks Rank.
What is the Zacks Rank?
The Zacks Rank is a unique, proprietary stock-rating model that utilizes earnings estimate revisions to help investors build a winning portfolio.
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.
These professionals manage the trillions of dollars invested in hedge funds, mutual funds, and investment banks, and studies have shown that they can and do move the market because of the large amounts of money they invest with. Thus, the market tends to move in the same direction as institutional investors.
These investors are known for designing valuation models that focus on earnings and earnings expectations in order to figure out the fair value of a company and its shares. If earnings estimates are raised, it puts a higher value on a company.
With these changes, institutional investors will act, usually buying stocks with rising estimates and selling those with falling estimates. An increase in earnings expectations can potentially lead to higher stock prices and bigger gains for the investor.
Since it can often take weeks, if not months, for an institutional investor to build a position (given their size), retail investors who get in at the first sign of upward earnings estimate 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
O'Reilly Automotive (, which was added to the Zacks Rank #1 list on August 3, 2021. ORLY Quick Quote ORLY - Free Report)
O'Reilly Automotive, Inc. is a leading specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. Founded in 1957, O'Reilly’s initially operated from a single store in Springfield, MO. The company’s stores offer several services and programs to customers, which include battery diagnostic testing, check engine light code extraction and loaner tool program, among others. The products offered by the company stores are vehicle accessories, such as floor mats and seat cover as well as maintenance items like antifreeze, engine additives, filters, fluids, lighting and wiper blades. Besides these, it provides new as well as remanufactured automotive hard parts like alternators, batteries, brake system components, belts, chassis parts, driveline parts, engine parts and fuel pumps.
Nine analysts revised their earnings estimate higher in the last 60 days for fiscal 2021, while the Zacks Consensus Estimate has increased $1.73 to $27.24 per share. ORLY also boasts an average earnings surprise of 15.8%.
Earnings are forecasted to see growth of 15.8% for the current fiscal year, and sales are expected to increase 7.9%.
Additionally, ORLY has climbed higher over the past four weeks, gaining 5.6%. The S&P 500 is up 1.7% in comparison.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, O'Reilly 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
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Our private Zacks #1 Rank List, based on our quantitative Zacks Rank stock-rating system, has more than doubled the S&P 500 since 1988. Applying the Zacks Rank in your own trading can boost your investing returns on your very next trade.
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