I wasn’t always a good investor. Over the past 30 years I’ve made just about every mistake imaginable.
· Jumped in at the peak
· Jumped out too late
· Bought falling knives
· Doubled down on losers
· You name it, I probably did it.
By the time I joined up with Zacks Investment Research in August 1999, I had eradicated most of those bad habits. But as Len Zacks and his brother Ben pointed out…I had a lot to learn.
What they taught me is that, indeed, earnings estimate revisions (EER) are the most powerful force impacting stock prices. And nothing captures that power more than the Zacks Rank rating system as proven by its +27% per year annual return.
The timing of this profound investment message could not have been better for me. As the stock market bubble popped in 2000 I started to apply this new investing approach. So even though the market tumbled that year I actually gained +16% in my personal account.
Was I hooked? Heck yes!!!
Each year since my knowledge and passion for this approach has grown. And there is nothing I like more than to share the wisdom of this investing strategy with others. My goal today is to spread some of that wisdom on to you so you can also enjoy great investment success in the years to come. I’m going to do that by listing…
The 3 Top Reasons to Love Earnings Estimate Revisions
1) The Most Fundamentally Sound Metric: There are so many different websites, magazines, books, TV stations etc. dedicated to investments. The amount of information overload is so unbearable that most investors walk away horribly confused about what is truly important to achieve success. So let me simplify the matter for you so you can push away all that noise and nonsense in the future.
At the end of the day, all stock price movements can be traced back to earnings.
Read that line again so it really sinks in. The reason it’s true is from the basic fact that when you buy shares in a company, you are actually buying a percentage ownership stake in that firm. And if you are the owner of a company, big or small, then the single most important metric to gauge success is how much earnings are generated.
If profits go higher than expected, the share price will rise. Conversely if profits go lower than expected, the share price will come down as well. The stock market has always worked on this premise and it always will. And nothing captures the essence of this notion more than earnings estimate revisions.
2) Applies to Every Type of Investor: Because all stock price movements can be traced back to earnings, it follows that earnings should be at the heart of every investment decision. But that is not the same as saying that earnings are the ONLY thing to consider when selecting a stock. That is just the starting point. From there, each investor can layer on other concepts such as value, growth, charts etc. to find the stocks that fit their unique approach.
My favorite analogy for this is to say that earnings are to stock investing as flour is to baking. That’s because nearly 100% of baked goods include flour in the recipe. What makes each item unique and delicious is the rest is what you add into it (sugar, flavorings, nuts, fruit, butter etc). Each way works out well, but each starts with flour to make it all come together. So you can apply other factors on top of earning and estimates to make it suit your unique investment tastes as well.
3) It WORKS!: When you put the philosophy and analogies aside, earnings estimate revisions simply work. This is clearly proven by the market-crushing +27% average annual returns of the Zacks Rank since 1988. Through up and down markets it has provided extraordinary, life-changing results for investors. I can certainly testify that is true for me. So I know it can do the same for you too.
Some of My Favorite EER Stocks
On Seeking Alpha my firm, Zacks Investment Research, has created a free app for you to see how well your stocks stack up in terms of Earnings Estimate Revisions. Just to get you started, here are some of my favorite EER stocks and their ratings in the Zacks App.
Disclosure: Why recommend stocks if you don't own them??? So yes, I own EMN, ETN and MAN