How to Use Zacks Ranking Systems to Find Top Stocks


Zacks Investment Research uses several proprietary methodologies and techniques to make it easier for investors to spot the best stocks at any given time. Let’s take a look at a recent example of how to use the various Zacks grading systems to good effect in today’s market environment.

– Zacks

One approach to getting the most out of what Zacks has to offer is to implement a top-down approach. With this investing tactic, we will start with the major stock market sectors identified by our Zacks Sector Rank system.

Zacks Sector Ranking: Improve Your Stock Picking Success

The Zacks Sector Ranking is a great top-down method that puts the odds of investing success in your favor. It is calculated by determining the average Zacks rank for all individual stocks in a given sector, and then assigning an ordinal rank to that sector. The Zacks ranking is based on the most powerful force impacting stock prices, which is earnings estimate revisions (more on that below). Zacks categorizes all stocks into one of 16 sectors. The Zacks sector ranking is calculated each trading day.

According to our 10-year backtest, stocks in the top 50% of Zacks sectors beat the bottom half by almost twice as much. This is clear evidence that stocks traded across the top 8 Zacks sectors can give your stock selection a decisive edge.

Zacks Investment ResearchImage source: Zacks Investment Research

From this point, we will target the Zacks Finance sector, which currently ranks in the top 13% of all sectors.

Zacks Industry Ranking: Locate the stocks with the best profit potential

A plethora of historical research studies have consistently shown that approximately half of a stock’s price appreciation is due to its industry group. Investing in stocks within leading industry groups provides a constant “tailwind” to our success. We can use the Zacks Industry Ranking to locate stocks with the greatest potential to outperform in the future.

Our industry ranking system sorts companies into over 250 industry groups. The Zacks Industry Rank is calculated by averaging the Zacks Rank for all individual stocks in a specific industry. Similar to the sector analysis, our 10-year backtest showed that the stocks of the top 50% of all Zacks-ranked industries outperformed the bottom half by a factor of more than 2 to 1.

Zacks Investment ResearchImage source: Zacks Investment Research

Once the major industry groups have been identified, we can open the curtain to find stocks with the highest Zacks rank. In our example, we will target the Zacks Banks-Foreign industry group which ranks in the top 37% of all industries.

Zacks Ranking: Putting it All Together

The Zacks Sector Ranking and the Zacks Industry Ranking are linked to our ranking system for individual stocks – the Zacks Ranking. The Zacks Ranking harnesses the power of earnings estimate revisions, which history has shown are the most powerful force impacting stock prices over time. Stocks whose earnings estimates have been revised upwards have significantly outperformed the S&P 500 year after year. This ranking system uses five different rankings: #1 (strong buy), #2 (buy), #3 (hold), #4 (sell) and #5 (strong sell).

The Zacks Ranking has simplified (and very cost effectively) the process of identifying the best stocks with improved earnings estimates. Since 1988, Zacks Rank #1 (Strong Buy) stocks have generated an annual return of 25.4% versus 11.2% for the S&P 500. Zacks Strong Buy stocks have also outperformed the S&P 500 for 27 of the 33 years that we have been tracking the data. Only the top 5% of stocks receive the coveted Zacks Rank #1 (Strong Buy) rating.

Our top-down process narrows the investable universe, starting with the Zacks Finance sector (top 13%) and followed by the Zacks Banks-Foreign industry (top 37%). Let’s take a look at some top Zacks Strong Buy stock contained in this combination of top sectors and industries.

UBS Group AG (UBS)

UBS Group AG provides financial advice and solutions to institutional, corporate and private clients worldwide. The company offers a host of finance-related services such as personal banking, investment advice and solutions, loans, wealth planning, asset allocation and investment banking. UBS was founded in 1862 and is headquartered in Zurich, Switzerland.

UBS released its fourth quarter results on February which exceeded analysts’ estimates. Fourth-quarter EPS came in at $0.38, beating Zacks consensus estimate of $0.24 by 58.33%. The Swiss bank’s net profit rose 14% to $7.46 billion in 2021, marking a 15-year high. Based on the impressive annual totals, UBS management announced it would double stock buybacks, initiating an additional $5 billion in buybacks for 2022.

UBS has exceeded earnings estimates in recent quarters and posted a four-quarter average earnings surprise of +44.79%. Stocks have risen at a steady pace, rising nearly 39% over the past year.

UBS Group AG and EPS award surprise

UBS Group AG and EPS award surprise

Despite the remarkable run, UBS is still relatively undervalued and trades at a forward P/E of just 9.54. The S&P financials sector has outperformed the S&P 500 year-to-date (only lagging energy), giving financials a favorable boost to start the new year.

Looking to the current quarter, analysts expect sales to rise 22.44% to $9.02 billion. Zacks consensus first-quarter EPS estimate is $0.57, which translates to 16.33% growth over the same quarter a year ago. For the year, analysts have revised 2022 EPS estimates up 11.92% over the past 60 days. The Zacks consensus estimate now stands at $2.16, which would represent growth of 4.85% from 2021.

Using a top-down approach using the various Zacks ranking systems can help investors find top-tier stocks like UBS more easily. As we move forward into 2022, be sure to take advantage of everything Zacks has to offer.

Zacks names ‘only one best choice for doubling up’

From thousands of stocks, 5 Zacks experts have each picked their favorite to skyrocket by +100% or more in the coming months. Of these 5, Research Director Sheraz Mian selects one to have the most explosive advantage of all.

It’s a little-known chemical company that’s up 65% year-on-year, but still very cheap. With relentless demand, rising earnings estimates for 2022 and $1.5 billion for stock buybacks, retail investors could step in at any time.

This company could rival or surpass other recent Zacks stocks that are expected to double, such as Boston Beer Company which jumped +143.0% in just over 9 months and NVIDIA which jumped +175.9% in one. year.

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