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 what's the best way to find the right combination of stocks? Because funding things like your retirement, your kids' college tuition, or your short- and long-term savings goals will definitely require 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.
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 responsible for managing the trillions of dollars invested in mutual funds, hedge funds, and investment banks. Research has shown that these investors can and do move the market due to the large amount of money they deal with, and thus, the market tends to move in the same direction as them.
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
Reliance Steel (, which was added to the Zacks Rank #1 list on July 29, 2021. RS Quick Quote RS - Free Report)
Los Angeles, CA-based Reliance Steel & Aluminum Co. is a leading metals service center company engaged in value-added materials management and metals processing services. It also distributes over 100,000 metal products to more than 125,000 customers across a vast spectrum of industries. Reliance Steel is the biggest North American metals service center company based on revenues with more than 300 locations.
Two analysts revised their earnings estimate upwards in the last 60 days for fiscal 2021. The Zacks Consensus Estimate has increased $4.67 to $18.42 per share. RS boasts an average earnings surprise of 9.1%.
Earnings are forecasted to see growth of 138.9% for the current fiscal year, and sales are expected to increase 49.3%.
Even more impressive, RS has gained in value over the past four weeks, up 5.9% compared to the S&P 500's gain of 2.4%.
With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Reliance Steel 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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