Stocks have done exceptionally well in recent years, with the S&P 500 index producing a double-digit return in 2017 and up more than +250% from the 2009 lows. But many investors didn't enjoy such strong returns in their own portfolios.
Why is that?
The simple answer is that they were in the wrong stocks because most investors typically invest without a clear roadmap. The rising tide of a broad rally will produce plenty of green arrows in most portfolios. But that is not enough to come out ahead of the market, which should be the goal of every investor.
It is reasonable to be optimistic about the investment environment in the New Year in light of market friendly policies from the administration. There are no doubt some great opportunities, but the New Year also brings its share of challenges. Thus now is exactly the time to make those decisions to put your portfolio on a sound footing for the year ahead. I hope the ideas in this article will help you do just that.
This May Not Be For You
If you are someone who has a consistent stock selection system that helped you come ahead of the market in 2017 and the preceding years, then you may not need our advice. Feel free to stop reading at this stage.
With the rest of you, I would like to share the investment process that we rely on here at Zacks, which makes use of 5 different factors to build a winning portfolio. Each one of these factors individually will help you pick good stocks. But putting all of them together gives you a significant edge over others in stock market investing.
Continued . . .
Zacks' Top 10 Stocks for 2018
From more than 4,000 stocks, these 10 have been hand-picked by Director of Research, Sheraz Mian as the best buy and hold stocks for the year.
Investor Alert: They are being released at 1 pm ET on January 2, the first trading day of the new year.
Be first to see them >>
This process lies at the heart of our Zacks Top 10 Stocks for 2018 service, which is about to be made available and has produced strong returns in recent years.
So how do you start to build up your own portfolio? First, it's important to recognize that random selection of good stocks, without an overarching outlook for the market, will not give you the desired results. Your portfolio should essentially be the execution of your outlook for the market.
That's why, when seeking our Top 10 Stocks for 2018, we started with our market outlook. Then upon that foundation we used the following factors to build the portfolio.
The 5 Elements of the Zacks Method for Investing
1) Valuation - There is plenty of empirical evidence showing that stocks with low valuations will outperform the market over the long haul. It's not easy to find 'cheap' stocks after the market's impressive run, but we look for companies that are trading with low Price-to-Earnings [P/E] and Price-to-Book [P/B] multiples relative to their peers and their own history.
2) Management Effectiveness - It is very important to get a sense for how effective the company's management is in utilizing the resources available to them. This can be done a number of different ways, but our research shows that Return on Equity [ROE] does a good job of capturing this attribute. So we seek out companies generating ROEs that are superior to their industry peers.
3) Recent Analyst Upgrades - Our research also clearly shows that stocks that have recently received a recommendation upgrade from brokerage analysts will continue to outpace the market. Most of that benefit is felt in the short run. However, quite often a stock that receives one upgrade is likely to get more in the future, which keeps pushing the stock higher.
4) Best Industries - Even the best looking stock will underperform the market if it's in an out-of-favor industry. That is why we overweight stocks from the best industries and sectors. And there is no better guide to choosing the right groups than the Zacks Industry Rank, which focuses on the earnings estimate revisions for all the stocks in the industry.
5) Timeliness - There is no better timeliness indicator than the Zacks Rank, which has produced annual returns of +25% since 1988 for Zacks Rank #1 (Strong Buy) stocks. We look for #1 and #2 Ranked stocks, but will consider #3 Ranked stocks if they show the potential for upgrade. These signals tell us that now is a good time to get into the stock.
Zacks has long been known for harnessing the power of earnings estimate revisions to foretell stock prices. No surprise then that three of the five factors make use of this powerful driver.
How to Find This Information?
The first 3 of these elements, valuations, ROEs, and analyst upgrades, are free and widely available from Zacks.com and other investment websites. If you just concentrated on these elements, you would be much better off than you are now.
The last 2 elements, Industry Rank and Zacks Rank, are proprietary to Zacks Investment Research and only available through our premium subscription services. Adding these two elements to the free ones above will put an almost unfair advantage in your hands.
The Best Way to Tap Into All 5 Elements
You can do it through our service that provides hand-selected picks to outperform the market: Zacks Top 10 Stocks for 2018. Keep in mind that these recommended buy-and-holds fully take into account the challenges and exciting opportunities waiting for us in the New Year.
And 2018 could be an exceptional year with tax cuts fueling corporate profits and investor confidence. I have seen estimates from Wall Street analysts that predict the 2018 earnings growth rate for the S&P 500 to roughly double, with gains even more pronounced for small-cap stocks. What this means is that large-cap earnings could be up as much +20% next year, with small-cap earnings almost double that level.
You can get a head start toward taking full advantage by being among the first to see the 10 stocks when they're released this Tuesday, January 2. There should be a wave of buying when these stocks are posted, and the sooner you invest in the Zacks Top 10 Stocks for 2018 portfolio, the greater your potential for gain.
Be First to See Zacks Top 10 Stocks for 2018 >>
Wishing you a happy and prosperous New Year,
Sheraz Mian is our Director of Research. He determines which data to use for assessing stocks and funds. He is a contributor for Zacks Equity Research and Earnings Analysis, and is also the Editor of Zacks Top 10 Stocks for 2018.