Zacks Investment Research

What Is Zacks Investment Research?

Zacks Investment Research is an American company dedicated to the production of independent research and investment-related content. It was founded in 1978 by Len Zacks, based on his insights while pursuing his Ph.D. at MIT.

The company provides professional investors with financial data and analysis to help make better investment decisions for proprietary accounts and the investment accounts of clients. Zacks is probably known best known for its extensive array of consensus earnings-per-share (EPS) estimates. More recently, the company has moved into other related areas including research reports, recommendation summaries on various stocks, stock prices, funds, charts and tables, and a host of other investment tools and data.

Understanding Zacks Investment Research

Zacks uses a quantitative stock-rating system that is purely mathematical, meaning they're not influenced by the biases or preferences of individual analysts. The rating system relies heavily on Earnings per share (EPS) related metrics, such as revisions to a company's projected earnings.

These ratings are based on research produced by U.S. brokerage firms. Every day, the company collects electronic data feeds and printed research on more than 8,500 North American publicly traded companies from 185 brokerage firms. By combining and aggregating the opinions of thousands of analysts, the company is able to identify expert consensus on the earnings potential of certain stocks.

Zacks Ranks

A key element of Zacks research products is Zacks Ranks, a set of investment ratings that groups equity products according to their earnings potential. Originally launched for stock rankings, Zacks Ranks is now available for mutual funds, exchange traded funds, and other vehicles.

Zacks Ranks assigns stocks into five categories ranging from "Strong Buy" to "Strong Sell," based on the aggregate analysis of multiple brokerage assessments. According to the company, Zacks "Strong Buy" stocks have generated better than 25% annual average returns and outperformed the S&P 500 in 26 years out of 30.

Zacks Ranks uses four criteria to assess earnings potential:

• Agreement: the extent to which brokerage analysts are unanimous in assessing the change in a stock's valuation.
• Magnitude: the size of the latest change in analysts' consensus.
• Upside: the difference between the estimated change, as calculated by Zacks, compared with the consensus estimate.
• Surprise: the occurrence of positive earnings surprises in the last few quarters.

These rankings are based on Len Zacks' insight that "earnings estimate revisions are the most powerful force impacting stock prices." When a stocks' earnings estimates are revised upwards, institutional buyers will typically enlarge their positions, thereby buoying the prices of that security. Since large buyers take a long time to enlarge their positions, a small individual investor can quickly take advantage of the anticipated price bump.

Zacks vs. Morningstar

Zacks Investment Research is frequently compared with Morningstar Inc., a Chicago-based investment research firm that compiles data on mutual funds and ETFs. Like Zacks, Morningstar publishes analysis and rates funds on a five-tiered scale.

However, the two companies take different approaches to investment research. While Zacks relies on quantitative analysis of fund performance, Morningstar has a larger focus on fundamental analysis. Morningstar also uses a proprietary mathematical formula, based on past performance, to determine how each fund ranks in its respective category. Both companies offer free and paid products, with different levels of access at each tier.

Example of Zacks Investment Research

Zacks lists several cases of successful predictions to demonstrate the success of their investment model. One example is LSB Industries (LSX), which was given a "Strong Buy" in July of 2012 in anticipation of a potential breakout over the next three months.

The "Strong Buy" rating indicated that brokerage analysts had revised their earnings estimates for LSX, and were likely to continue revising their projections upwards. Within three months, following several more upward revisions, LSX had returned 36% gains to investors who used Zacks Research, compared to 5% returns by the S&P 500.

The Bottom Line

Zacks Investment Research is one of many firms that publish data and analysis of mutual funds, stocks, and other investment vehicles. However, Zacks stands out for its unique quantitative approach, focusing on revised earnings estimates as the key to identifying strong performers. Because brokerage analysts tend to be extremely conservative when it comes to revising their estimates, these revisions can be indicators of strong future performance.