Computer & Technology

How to Find Strong Buy Computer and Technology Stocks Using the Zacks Rank – November 12, 2021

Building a successful investment portfolio takes skill and hard work, no matter if you’re a growth, value, income, or momentum-focused investor.

How do you find the right combination of stocks that will generate returns that could fund your retirement, or your kids’ college tuition, or your short- and long-term savings goals?

Enter the Zacks Rank.

What is the Zacks Rank?

A unique, proprietary stock-rating model, the Zacks Rank uses earnings estimate revisions, or changes to a company’s earnings expectations, to help investors create a winning portfolio.

There are four main factors behind the Zacks Rank: Agreement, Magnitude, Upside, and Surprise.

Agreement is the extent to which all brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of analysts revising their estimates higher, the better chance the stock will outperform.

Magnitude is the size of the recent change in the consensus estimate for the current and next fiscal years.

Upside is the difference between the most accurate estimate, which is calculated by Zacks, and the consensus estimate.

Surprise is made up of a company’s last few quarters’ earnings per share surprises; companies with a positive earnings surprise are more likely to beat expectations in the future.

These four factors are assigned a raw score that’s recalculated every night, which is then compiled into the ranking system. Stocks are classified into five groups using this data, ranging from “Strong Buy” to “Strong Sell.”

The Power of Institutional Investors

The Zacks Rank also allows individual investors, or retail investors, to benefit from the power of institutional investors.

Institutional investors are the professionals who manage the trillions of dollars invested in mutual funds, investment banks, and hedge funds. Studies have shown that these investors can and do move the market due to the large amounts of money they invest with. Because of this, the market tends to move in the same direction as institutional investors.

These investors are known for designing valuation models that focus on earnings and earnings expectations in order to figure out the fair value of a company and its shares. If earnings estimates are raised, it puts a higher value on a company.

Institutional investors then act on these changes in earnings estimates, typically buying stocks with rising estimates and selling those with falling estimates; an increase in earnings estimates can translate into higher stock prices and bigger gains for the investor.

Because it can take a long time for an institutional investor to build a position — sometimes weeks, if not months — retail investors who get in at the first sign of upward revisions have a distinct advantage over these larger investors, and can benefit from the expected institutional buying that will follow.

Not only can the Zacks Rank help you take advantage of trends in earnings estimate revisions, but it can also provide a way to get into stocks that are highly sought after by professionals.

How to Invest with the Zacks Rank

The Zacks Rank is known for transforming investment portfolios. In fact, a portfolio of Zacks Rank #1 (Strong Buy) stocks has beaten the market in 26 of the last 32 years, with an average annual return of +25.41%.

Moreover, stocks with a new #1 (Strong Buy) ranking have some of the biggest profit potential, while those that fell to a #4 (Sell) or #5 (Strong Sell) have some of the worst.

Let’s take a look at Apple (AAPL Free Report) , which was added to the Zacks Rank #1 list on September 9, 2021.

Apple’s business primarily runs around its flagship iPhone. However, the Services portfolio that includes revenues from cloud services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services now became the cash cow.

Five analysts revised their earnings estimate higher in the last 60 days for fiscal 2022, while the Zacks Consensus Estimate has increased $0.06 to $5.77 per share. AAPL also boasts an average earnings surprise of 22.3%.

Earnings are forecasted to see growth of 2.9% for the current fiscal year, and sales are expected to increase 5.3%.

AAPL has been moving higher over the past four weeks as well, up 2.9% compared to the S&P 500’s gain of 6.7%.

Bottom Line

With a #1 (Strong Buy) ranking, positive trend in earnings estimate revisions, and strong market momentum, Apple should be on investors’ shortlist.

If you want even more information on the Zacks Ranks, or one of our many other investing strategies, check out the Zacks Education home page.

Discover Today’s Top Stocks

Our private Zacks #1 Rank List, based on our quantitative Zacks Rank stock-rating system, has more than doubled the S&P 500 since 1988. Applying the Zacks Rank in your own trading can boost your investing returns on your very next trade. See Today’s Zacks #1 Rank List >>