The Zacks Philosophy
Years of quantitative research by Zacks Investment Research have shown that the strongest determinant of future stock performance is revisions in analysts' earnings estimates.
What Are Earnings Per Share Estimates?
Very simply put, earnings per share (EPS) estimates are analysts' opinions of how much profit a company will show based on factors such as management, anticipated sales, demand, competition, and overall economic conditions. Wall Street analysts are paid millions of dollars to dig deeply into companies to be able to predict accurately what those companies' future earnings will be. These estimates are very important because they are a reliable measure of the health and prospects of a company.
Analysts provide earnings estimate revisions to Zacks Investment Research each day. Zacks then collates these various estimates and compiles a consensus estimate made up of all the estimates of all the analysts who are following a particular stock.
Why are EPS Estimates important?
The real value of EPS estimates is not in the estimates themselves, but in the changes in the estimates. Theoretically, when analysts increase their EPS estimate, investors' expectations of future earnings increase and the value of the company (and thus its stock price) increases.
Years of quantitative research by Zacks Investment Research have shown that the strongest determinant of future stock performance is revisions in analysts' earnings estimates.
Another important consideration is Earnings Per Share Surprises. When a company reports quarterly EPS that differs from the consensus estimate, the stock price usually reacts immediately. While this change is generally too fast for individual investors to exploit, the full impact of the EPS Surprise occurs over the next few weeks. The analysts will do in-depth research to find out why/if they were wrong about their estimates, and based on what they find they may change their EPS estimates for future quarters. It is these changes in EPS estimates that have a long-term impact on stock prices.
How Can I Use EPS Estimates to Make Money?
Zacks provides the individual investor with several ways to benefit from the power of EPS estimates.
- The Zacks Rank
- E-mail Portfolio Updates
- EPS Surprise Module
Zacks Rank:
The Zacks Rank rates stocks in terms of their expected price performance over the next three to six months. The Rank is a quantitative model based on trends in estimate revisions and EPS surprises. Stocks are ranked from 1 to 5, with 1 being the best rank ("strong buy") and 5 being the worst ("strong sell").
Consider purchasing stocks with a Zacks Rank = 1 ("Strong Buy").
During the 19 years, 1979 - 1998, the Zacks Ranked #1 stocks provided an average annual return of 35.1% vs. only 17.4% for the S&P 500. The Zacks Rank is also a key underlying component of many of the portfolios recommended in the Zacks Advisor.
Portfolio Updates (e-mailed to you nightly):
Portfolio updates alert you to key events that may impact the stocks in your portfolio.
Though these alerts can be used for both buy and sell decisions, they are generally more valuable as a sell signal. Unless you know more about a company than the analyst does, you should consider selling when:
- a company reports a negative EPS Surprise
- analysts begin lowering their EPS estimates
- the Zacks Rank drops
- a brokerage firm lowers its recommendation
- a stock is taken off the Zacks Focus List
- insiders are selling
- the dividend is reduced
- company news is negative
EPS Surprise Module:
The EPS Surprise section of Zacks.com is updated throughout the day to keep you abreast of earnings surprises. Zacks offers the fastest EPS Surprises available on the Internet.
- Consider purchasing stocks that reported a positive EPS surprise.
- Be wary of purchasing stocks that reported a negative EPS surprise.
- If you own a stock that reported a negative surprise, consider selling the stock
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