Finding winning stocks can sometimes feel like a grind, but the Zacks Rank system has simplified that process for investors. By using a powerful earnings revision-based methodology, the Zacks Rank helps identify stocks poised for near-term growth, delivering proven results. Stocks with a high Zacks Rank, especially those ranked #1 (Strong Buy) and #2 (Buy), have historically outperformed the broader market.
In this article, we’ll break down how the Zacks Rank system works and how you can use it to identify stocks with market beating potential. Whether you’re looking for the next breakout stock or a reliable addition to your portfolio, understanding the Zacks Rank could be the key to unlocking winning investment opportunities.
Decoding the Zacks Rank Mechanism
The Zacks Rank system is a unique and powerful tool that ranks stocks based on changes in earnings estimates, providing investors with an edge in identifying potential winners. The core idea behind the Zacks Rank is that earnings estimate revisions—analysts upgrading or downgrading a company’s earnings forecast—are one of the most powerful drivers of stock prices. Stocks with rising earnings estimates tend to outperform the market, while those with declining estimates often underperform.
- Crucial Factor: Earnings Estimate Revisions: The Zacks Rank is primarily based on the magnitude, direction, and agreement of analysts’ earnings estimate revisions. When analysts revise their estimates upwards, it signals confidence in the company’s future performance. The more analysts revising upwards, the better the signal.
- Rank Categories: The Zacks Rank is divided into five categories. The most attractive stocks are assigned a Zacks Rank #1 (Strong Buy), followed by Zacks Rank #2 (Buy), Rank #3 (Hold), Rank #4 (Sell), and Rank #5 (Strong Sell). Stocks in the top tiers (#1 and #2) tend to outperform the market significantly, while those in the lower tiers (#4 and #5) are likely to underperform.
- Timely Updates: The Zacks Rank is updated daily, allowing investors to capitalize on the most recent earnings estimate revisions. This timeliness ensures that investors are working with the latest information, enabling better decision-making based on current market conditions.
The Zacks Rank can take a lot of the guesswork out of picking stocks by taking advantage of the incredibly powerful earnings revision trend.
Analyzing The Progressive Stock
In the table below we can see a lot of the important variables that go into calculating the Zacks Rank. The Progressive (PGR) is an industry leading insurance company and currently boasts a Zacks Rank #1 (Strong Buy) rating.
On the left we can see how many analysts are covering the stock and whether they are upgrading the estimates or downgrading. Under Q1 we can see that of the 11 analysts covering PGR stock, eight have raised the estimates and zero have lowered.
Then on the right, we can see the magnitude of those revisions. Under Q1, we see that 60 days ago analysts were projecting earnings per share of $2.58. But thanks to the upward revisions, earnings are now expected to be $3.22 per share, which is nearly a 25% revision higher.
Revisions higher to a company’s bottom line like this are huge drivers of returns.
Image Source: Zacks Investment Research
Reasons to Embrace the Zacks Rank
The Zacks Rank is a proven tool for investors seeking an edge in stock picking. Its focus on earnings estimate revisions gives it a clear advantage in identifying stocks with strong near-term growth potential.
For investors who want to explore the Zacks Rank and all the other tools and research Zacks offers, I highly recommend checking out the premium subscriptions.
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