The 6 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) Long-Term Attractiveness – We look for stocks with a Zacks Recommendation of ‘Neutral’ or better that enjoy catalysts for outperformance. While our preferred long-term indicator is an ‘Outperform’ rating, we also consider neutral-rated stocks that stand to get upgraded to our preferred rating. The main ingredient behind the Zacks Recommendation is positive changes in a company’s earnings estimates.
6) Timeliness – There is no better timeliness indicator than the Zacks Rank, which has produced annual returns of +26% since 1986 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. Just like the Zacks Recommendation, it focuses on stocks with the best earnings estimates.
Zacks has long been known for harnessing the power of earnings estimate revisions to foretell stock prices. No surprise then that half of the six factors makes use of this powerful driver.
How to Find This Information?
The first three of these elements 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 three elements are proprietary to Zacks Investment Research and only available through our premium subscription services. Adding these three elements to the free ones above will put an almost unfair advantage in your hands.
The best way to tap into all 6 elements right now is through our Zacks’ Top 10 Stocks for 2014 service. These stocks have been hand selected to outperform the market, which is amply borne out by its recent performance. In 2013, we had a phenomenal +40.1% return through the end of November, handily beating the S&P 500 index. In 2012, the Top 10 portfolio nearly tripled the market’s performance, with returns of +31.7% vs. the +12.1% returned by the S&P 500.
Get In On the Ground Floor
After all, the sooner you invest in Zacks’ Top 10 Stocks for 2014 portfolio, the more you figure to gain. Plus, you will be well positioned to withstand any market uncertainty with fewer worries. Be among the first to take advantage of these Best-of-the-Best fundamentally sound stocks before they’re released on Thursday, January 2.
Sheraz Mian is the Director of Research. He determines which valuable data to use to assess winning 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 2014.