What it means
Zacks collects earnings forecasts from many brokerage analysts and combines them into consensus estimates, which are the average expected earnings per share for a company. Its research products are used by individual investors, advisers and some institutions to track how expectations are moving.
The firm is best known for turning that data into a simple ranking that is easy to scan. The Zacks Rank assigns stocks a score from 1 to 5, where 1 is a strong buy and 5 is a strong sell.
The ranking leans heavily on changes in earnings estimates, on the idea that when analysts raise their forecasts for a company, its share price tends to follow. The exact scoring method is proprietary, so outsiders see the result rather than the full formula.
Zacks also publishes data on earnings surprises, which measure how far a company's actual results landed from the consensus forecast. A positive surprise means the company beat expectations, and a negative surprise means it missed.
Business readers meet these figures in financial news, where a share price often moves on the surprise rather than on the profit number itself. It is important to treat any ranking as one input rather than a decision.
A rank based on estimate changes tells you what forecasters are doing, not whether the shares are cheap or whether the business is sound. Finance teams use such data to understand how the market views a competitor, a customer or their own company, but they pair it with their own analysis.
Because the firm is a commercial research provider, its ranks and forecasts are opinions and statistical outputs, not guarantees. Anyone using them should read the provider's own disclosures about method and past performance.
They should also compare several sources, since consensus figures can differ slightly between data vendors.
In practice
Real-world examples.
Example
A retail investor screens for stocks whose earnings estimates have been raised in the last month. She uses the Zacks Rank as a first filter and then reads the companies' reports before investing. The ranking narrows hundreds of names to a short list for study.
Example
The finance director of a software company looks at the consensus estimate for his own firm before the quarterly results. The consensus is $0.50 per share, and his budget says $0.52. He briefs the board that a small beat is likely, and prepares investor messages for both outcomes.
Example
A marketing analyst at a consumer goods group tracks a rival's earnings revisions to judge whether it is gaining or losing ground. When analysts cut the rival's forecasts three times in two months, the analyst flags it to the strategy team. The team then looks closely at the rival's recent promotions.
Formula
Calculation
Earnings surprise % = (Actual EPS - Consensus EPS) / Consensus EPS x 100
A listed company is expected to report earnings per share (profit divided by shares in issue) of $1.00. It reports $1.10. The surprise is (1.10 - 1.00) / 1.00 x 100 = 0.10 / 1.00 x 100 = 10%. If it had reported $0.90 instead, the surprise would be (0.90 - 1.00) / 1.00 x 100 = -10%, a miss.Case study
Seen in the real world.
Birchwood Advisory is an illustrative, fictional boutique that manages money for about 80 families. A junior analyst proposes using a rank from a research provider as the main basis for buying shares. The partners agree to test the idea using a small sleeve of $500,000 for a year.
At the end of the year, the sleeve has performed roughly in line with the market. Some of its best holdings were highly ranked stocks that kept rising, while others fell sharply after one disappointing quarter. The partners conclude that the rank is a helpful screen but not a substitute for reading the accounts.
In the illustrative follow-up, Birchwood keeps the ranking as one of five inputs in its process. The lesson is that research scores are most useful when they prompt a question, not when they answer it for you.
Watch out
Common mistakes.
- Treating a Zacks Rank of 1 as a guarantee that the share price will rise, when it is a statistical signal based on estimate revisions.
- Assuming the rank measures whether a stock is cheap, when it focuses on the direction of earnings forecasts rather than valuation.
- Using one vendor's consensus as the only figure, when different providers may collect slightly different sets of analyst forecasts.
Questions
People also ask.
What is the Zacks Rank?
It is a scoring system from 1 to 5 that sorts stocks mainly by how analysts are revising their earnings estimates.
Is the full method public?
No, the detailed scoring method is proprietary, though the firm describes the general approach.
Is Zacks a regulator?
No, it is a private research and data provider, and its output is not a regulatory ruling or an official rating.
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