The performance of a stock depends on a number of factors. While changes in company fundamentals directly impact price movement, the broader industry and economy sometimes play a significant role too.
In fact, studies have shown that an average stock in a strong industry is likely to perform better than an exceptional stock from an industry that has fallen out of favor with investors. Therefore, a combination of top-performing industries and stocks with the potential to shine will surely enhance your investment portfolio. This is also called top-down investing.
Though finding the top industries is not easy, the Zacks Industry Rank makes this task relatively simple.
Zacks Industry Rank
A top Zacks Industry Rank signifies that more stocks within that group are likely to witness upward earnings estimate revisions, hinting at bullishness.
The Zacks Industry classification divides the business world into 16 sectors comprising 60 medium or M-level industries and 260 plus or X-level industries. We rank all 260 plus X-level industries based on the earnings outlook for the constituent companies in each industry.
One of the top-ranked industries currently is Medical HMO. It carries a Zacks Industry Rank #16 (top 6% of the 250 plus Zacks industries). Our back-testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry despite being riddled with stringent regulations which reduces operating flexibility to certain extent, has witnessed a bull run for the past many years. The same is evident from growth of 354% registered by the industry since the Affordable Care Act came into effect (one of the most arduous reforms which redefined the industry), compared with a rise of 117.6% for the S&P 500 index.
Though past performance doesn’t guarantee future performance, the industry is perfectly poised to weather regulatory uncertainty and any changes it may lug along given its fundamental strength. We are thus confident of the bull run in the industry to continue.
Declining uninsured rates, increasing enrollment, expansion of product portfolio, demographic changes, new service offerings, and foray into international operations have driven overall growth of the players in the industry.
However, increasing medical costs, higher expenses in the form of regulatory compliance cost, and increased investments in technology are weighing on the bottom line to some extent. Nevertheless, these investments (in technology and regulatory compliance) will aid long-term growth by making operations more automated and streamlined.
Thus albeit short-term hiccups, the long-term path to the industry’s success looks clear.
4 Stocks From This Industry
Along with picking a top-ranked industry, one needs to be cautious in choosing stocks to get meaningful profits.
We would pick the stock on the basis of their favorable Zacks Rank, which indicates that these have been witnessing positive estimate revisions that generally translate into rapid price appreciation. The industry’s performance will add to it, too. Research says that about half the price performance of a stock can be attributed to the industry group that it belongs to.
These stocks also boast a positive earnings surprise history and have generated handsome returns in a year. Moreover, these stocks have a Value Score of A or B. Back-tested results show that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), handily outperform other stocks.
Centene Corp. (CNC - Free Report) beat estimates in three of the last four quarters with an average positive surprise of 7.7%. Also, the Zacks Consensus Estimate for 2017 and 2018 moved up 2.5% and 2.1%, respectively, in the last 60 days. Centene carries a Zacks Rank #2 and sports a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Magellan Health, Inc. (MGLN - Free Report) has a Zacks Rank #2 and a Value Score of A.
The stock beat estimates in three of the last four quarters with an average positive surprise of 23.9%. Also, the Zacks Consensus Estimate for 2018 has moved up 3.7% in the last 60 days.
WellCare Health Plans Inc. (WCG - Free Report) carries a Zacks Rank #2 and has a Value Score of B. The stock beat estimates in each of the last four quarters with an average positive surprise of 47.4%. Also, the Zacks Consensus Estimate for both 2017 and 2018 moved up 1.7% in the last 60 days.
Aetna Inc. (AET - Free Report) carries a Zacks Rank #2 and has a Value Score of B. The stock beat estimates in each of the last four quarters with an average positive surprise of 19%. Also, the Zacks Consensus Estimate for 2017 and 2018 moved up 6.1% and 2% in the last 60 days.
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