The 5 Elements of the Zacks Method for Investing

 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. As simple as it sounds, it is never easy to find objectively 'cheap' stocks even after the type of market we have recently witnessed. We look for companies that are trading at reasonable Price-to-Earnings [P/E] and Price-to-Book [P/B] multiples relative to their peers and their own history. We say 'reasonable' instead of 'low' because many 'low' multiples are simply 'value traps' and the analysis has to be done in the context of prevailing and expected interest rates.

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 overweigh 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 +24.48% since 1988 for Zacks Rank #1 (Strong Buy) stocks. We look for stocks with a Zacks Rank of 1 and 2, but will consider Zacks Rank #3 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 the last two factors make use of this powerful driver.

Where to Find This Lucrative 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