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After trying Zacks Investor Collection, is it really good for long-term investors who are looking for stock recommendations?
How have the stock recommendations in the Zacks Investor Collection portfolios performed so far?
Can you really achieve better-than-average returns by following these stock recommendations?
Zacks Investor Collection Portfolios
Zacks Investor Collection basically gives you access to stock recommendations from a bundle of Zacks’ six different long-term investor portfolios:
- ETF Investor
- Home Run Investor
- Income Investor
- Value Investor
- Stocks Under $5
- Zacks Top 10
ETF Investor portfolio uses Zacks Industry Rank and Zacks ETF Rank to find emerging trends and then ride them through ETFs (Exchange Traded Funds)
The holding period is about 12 months with 20-25 stocks in the portfolio.
Home Run Investor portfolio uses Zacks Rank and Zacks’ team of analysts’ top-down analysis to find smaller-cap aggressive growth companies with Home Run potential (i.e. 50%, 100%, 200% upside potential).
The holding period is about 1 – 2 years with about 30 stocks in the portfolio.
Income Investor portfolio focuses on companies that generate significant free cash flow and routinely distribute ever-increasing dividends, and uses Zacks Ranks to find companies with stable to improving earnings estimates.
The holding period is about 1 – 2 years with about 20-25 stocks in the portfolio.
Value Investor portfolio finds value stocks by using the following criteria:
- Zacks Rank is showing earnings are revised upwards
- Stock is trading at a +25% discount in terms of PE, PEG, Book Value, etc
- Growth companies trading at a discount
The holding period is about 1 to 12 years with about 20-25 stocks in the portfolio.
Stocks Under $10 portfolio uses Zacks Rank and top-down analysis to find stocks that are under $10 with positive earnings revision momentum and strong revenue growth.
The holding period is about 6 months to 1 year with about 20-25 stocks in the portfolio.
Zacks Top 10 uses the following 5-step process to pick the top 10 stocks for the year:
- Zacks Rank (Strong Buy/Buy ratings)
- Zacks Industry Rank
- Value Analysis (e.g. PE, PB rations)
- Management Effectiveness
- Brokerage analyst downgrading or upgrading
As you can see, all the above-mentioned portfolios use Zacks Rank in the stock picking process.
Zacks Rank
What is Zacks Rank?
Is it really good?
The most frequently used would be the Zacks Rank, which is a type of ranking assigned to stocks with #1 being Strong Buy and #5 being Strong Sell.
So, what is Zacks Rank?
How do they calculate the Zacks Rank?
Before we go into the details of how the stock ranking is determined, let’s first understand what is the strategy behind its stock-picking system.
Zacks’ stock ranking is founded entirely on one premise:
“Earnings estimate revisions are the most powerful force impacting stock prices.”, according to Zacks’ Founder and CEO, Len Zacks,
So, what that means is that if the stock’s earnings estimate is revised higher, then the Zacks’ rank of the stock will be high.
Conversely, if the stock’s earnings estimate is revised lower, then the Zacks’ rank of the stock will be low.
Now, what does Zacks get all the stocks’ earnings estimates?
It collects and analyzes the stocks’ earnings estimates from all the brokerage analysts that follow the stocks.
Then, it uses a mathematical formula to calculate the Zacks’ Rank of the stock.
Basically, the logic behind this mathematical formula is that if more analysts agree that the earnings estimates should be revised upward and the upward revisions are bigger, then Zacks would assign a higher (i.e. more favorable) rank to the stock.
However, there is a drawback to this methodology.
The accuracy of Zacks Rank entirely depends on how accurately the brokerage analysts can estimate the underlying company’s earnings.
The truth is that all analysts use ASSUMPTIONS in their financial modeling to estimate future revenue and earnings.
Assumptions are rarely 100% correct.
In fact, even a small change in their assumptions (e.g. the estimated growth rate in the revenue) could lead to very big differences in the analysts’ conclusions.
On top of that, if there are very few analysts covering the stock (e.g. 2 or fewer), you need to pray that these two people really know their stuff.
There are a total of 5 different ranks:
- Zacks Rank #1 (i.e. Strong Buy)
- Zacks Rank #2 (i.e. Buy)
- Zacks Rank #3 (i.e. Hold)
- Zacks Rank #4 (i.e. Sell)
- Zacks Rank #5 (i.e. Strong Sell)
When Zacks Rank issues a “Strong Buy” or “Buy” (Zacks Rank #1 or #2), what it means is that the stock’s earnings estimates are rising.
If the stock’s earnings are going to be more than expected, then the stock would be undervalued and the stock price would likely go up.
When Zacks Rank issues a “Strong Sell” or “Sell” (Zacks Rank #5 or #4), what it means is that the stock’s earnings estimates are declining.
If the stock’s earnings are going to be less than expected, then the stock would be overvalued and the stock price would likely go down.
Zacks Industry Rank is derived from Zacks Rank.
Basically, the strong industry will be one with a higher average Zacks Rank for all the stocks in the industry.
However, these Zacks Ranks are ONLY for short-term trading (i.e. the next 1 to 3 months), but not for long-term investment.
Here’s why.
Publicly traded companies are required to report their quarterly earnings.
If a company suddenly reports surprise better-than-expected earnings and adjusts its previous forward guidance upwards, then analysts would most probably rush to revise their earnings estimates upwards.
This will have an immediate and positive impact on Zacks’ Rank.
The next “earnings estimate revision” will most likely happen when it reports its next quarterly earnings which is about 3 months away, unless the company releases an earnings-related announcement before that.
So, the “earnings estimate revisions” indicator that Zacks uses is ONLY valid for at most one quarter.
Do I find Zacks Rank useful?
Personally, I am not convinced by using one single “earnings estimate revisions” indicator to trade stocks, although I do agree with the logic that earnings estimate revisions are probably positively correlated with stock price movements.
After going through the stock-picking processes of all the Zacks Investor Collection portfolios, I think it’s NOT meant for long-term investors.
First of all, Zacks Rank is specifically meant for short-term trading (1-3 months), but it’s being used to pick stocks for long-term investors.
Also, I don’t want to rely on just Zacks Rank (i.e. an earnings estimate indicator) to make my investment decisions because there are just so many factors influencing the stock market.
Although the website mentions the impressive market-beating performance of Zacks Rank, Personally I find that the method it uses to calculate its performance is very flawed.
First of all, Zacks #1 Rank Strong Buy Stocks’ performance used to be calculated based on monthly rebalancing (by the way, this method produces even more inaccurate returns).
A few years ago, it changed to weekly rebalancing, which is less inaccurate than before but still inaccurate.
Here’s why.
Some stocks stay on the strong buy Zacks #1 list for only one day, based on my observation.
That means these stocks are included in investment returns calculation for a few days longer.
For Strong Buy Stocks that are recommended not at the beginning of the week, they will be included in the calculation of the return for a few days shorter.
At the end of the day, you need to decide whether you can get a lot of value out of “Zacks Rank” because this is essentially what Zacks is offering.
Zacks Investor Collection Stock Picks & Performance
So, what are Zacks Investor Collection stock recommendations?
How have these stock recommendations performed?
(1) Zacks Home Run Investor Portfolio
Home Run Investor portfolio started in 2011.
As of 11th Oct 2023, there are a total of 629 closed trades with 374 losing trades (59.4%) and 255 winning trades (40.6%).
The biggest win is 361.9% over a two-year holding period, while the biggest loss is 60.68% over a month’s holding period.
Assuming equal weighting for all the stocks, the average return of these 629 trades is 0.03%.
So, after 12 years, the Home Run Investor portfolio value stayed flat while the S&P 500 went up 336.92% since 2011.
Now, let’s look at the performance of Zacks’ Home Run Portfolio in 2023 so far.
Below are the closed trades in the Zacks’ Home Run Investor portfolio for the year 2023.
As you can see, a lot of trades were closed just one or two months later.
This contradicts the claim that “Zacks Investor Collection” portfolios are for long-term investors.
Also, I don’t think a “home run” (50% -200% potential return) is often achieved in a span of one or two months.
Below are the current open trades in the Zacks’ Home Run Investor portfolio.
Let’s look at an example of Home Run Investor Portfolio stock recommendation.
Sinclair was recommended on 8th June 2023.
Then, the position was closed 14 days later on 22nd June 2023.
I found it super bizarre because Sinclair was recommended by Zacks as a top stock pick on 15 June 2023, as shown below.
So, in a matter of 7 days, Zacks’ team of analysts changed their opinion about Sinclair?
What surprises me is that Sinclair was Zacks Rank #1 Strong Buy on 4th July 2023.
Then, it is currently rated a “Strong Sell” according to Zacks Rank as of 11th Oct 2023.
From Zacks Rank Strong Buy to Strong Sell, it took 3 months.
This is consistent with Zacks Rank being used for short-term trading only.
As you can see Sinclair’s EPS surprise changed from up to down in 3 months, roughly when it was about to report quarterly earnings.
Personally, I am not impressed with Zacks Home Run Investor stock recommendations because the performance was not good and it was mostly short-term trading picks instead of thoroughly researched long-term growth stock picks.
Now, let’s take a look at Zacks Value Investor Portfolio stock picks and performance.
(2) Zacks Value Investor Portfolio
Zacks Value Investor Portfolio started in 2011.
As of 11th Oct 2023, there are 315 closed trades with 162 losing trades (51.4%) and 153 winning trades (48.6%).
The biggest gain is 348.69% over a period of 21 months, while the biggest loss is 48.59% over two months.
Assuming equal weighting for all the stocks, the average return is only about 0.1% over a period of 12 years.
Below are the closed trades in 2023 for the Zacks Value Investor Portfolio.
As you can see, unprofitable positions were closed very quickly, sometimes in a couple of weeks and sometimes in a few short months.
Going through the closed trades from 2011 to 2022, I saw a similar pattern which is that losing trades were rarely held for more than a few months.
I didn’t expect it because if thorough research had been carried out and the stocks were truly undervalued good businesses, wouldn’t it make sense to give it more time to see if the stocks could eventually go up?
After all, this Zacks’ Value Investor Portfolio is supposed to be meant for long-term investors, not short-term traders.
Below are the current open positions for the Zacks Value Investor Portfolio.
As you can see, some profitable positions are still open since 2019, 2020, 2021, and 2022.
For the year 2023, there are eight open positions with two trades doing quite well.
Compared to the Home Run Investor Portfolio, the Value Investor Portfolio does not have as many trades.
Overall, I don’t find Value Investor Portfolio’s performance very impressive.
Also, it’s very different from what I had expected.
If you want to find good undervalued companies, Morningstar might be a more suitable platform because it specializes in uncovering high-quality businesses with sustainable competitive advantages (i.e. Wide Moat) based on in-depth independent research and analysis.
Lastly, let’s look at Zacks Income Investor Portfolio stock picks and performance.
If I invest in dividend stocks, I prefer to find good dividend-growth stocks that keep increasing dividends over the years and hold them for the long term.
However, going through the closed trades in the past few years, quite a number of trades were closed in a year or so.
I thought income investing was supposed to hold the dividend stocks to get paid dividends every year.
Also, there are just simply too many trades to my liking.
I prefer a few really good dividend stocks to many average dividend stocks.
Zacks Investor Collection Pricing
So, how much does Zacks Investor Collection cost?
Zacks Investor Collection costs $59/month which is $708/year.
As a subscriber to Zacks Investor Collection, here’s what you get:
My Zacks Investor Collection access includes:
- Real-time buy & sell alerts from all private long-term portfolios such as Home Run Investor and Value Investor
- Full access to Zacks Premium research
- Exclusive market insights from the Zacks team of Stock Strategists
- Member-only website with open positions & live performance
- Daily briefing on key developments & portfolio changes
Is it worth it to pay about $700 for Zacks Investor Collection stock recommendation and Zacks Rank?
I think there are better and more affordable stock research and analysis platforms.
For example, I personally use Morningstar, Seeking Alpha, and Stock Rover.
Zacks Investor Collection Alternatives
Personally, I recommend Morningstar Investor for people who are looking for good and undervalued long-term stock ideas.
If you want to use quantitative stock ratings in your stock research, I recommend Seeking Alpha Premium which I personally use.
Seeking Alpha Premium has all the financial information and data (i.e. US stocks as well as international stocks) to help you research and analyze stocks.
Also, its proprietary Author Rating and Quant Rating can help you filter through thousands of stocks easily and also help you identify the latest investment opportunity.
For each stock, you can find the latest Seeking Alpha Premium ratings on the stock:
- SA Author Ratings ‒ ranging from Strong Buy to Strong Sell
- Wall Street Ratings – consensus and price targets on the stock by Wall Street Analysts
- Quant Ratings ‒ based on over 100 metrics, updated daily
The most interesting of all is its proprietary Quant rating.
It was developed by CressCap, quantitative analytics and data platform that was acquired by Seeking Alpha.
So, what exactly is Quant Rating, and also how does it really work?
Quant rating is derived by comparing over 100 metrics for the stock to the same metrics for the other stocks in its sector.
These metrics include the company’s financial data, stock price performance, and analysts’ estimates of future revenue and earnings.
There are five types of Quant ratings:
- Strong Sell (i.e. a score of 1)
- Sell (i.e. a score of 2)
- Hold (i.e. a score of 3)
- Buy (i.e. a score of 4)
- Strong Buy (i.e. a score of 5)
The advantage of this method is that you can use Quant Rating to find the best performer of any particular industry or sector.
So, how exactly is Quant Rating calculated?
Quant Rating is derived after taking into account the following five “Factor Grades”:
- Value
- Growth
- Profitability
- Momentum
- EPS Revisions
The Factor Grade is determined by comparing the relevant metrics for the factor for the stock to those for the other stocks in the same sector.
For example, to determine the grade for the “Growth” factor, metrics such as past sales growth, projected earnings growth, and stock price performance for the stock will be compared to the same metrics for the other stocks in the same sector.
Then, each factor is assigned a grade, from A+ to F.
Grade A+ means that the stock has the highest growth potential compared to its peers in the same sector.
On the other hand, a grade of F means that the stock has the lowest growth potential compared to its peers in the same sector.
So, how do you use Seeking Alpha’s Factor Grades?
The value, growth, and profitability grades give you a snapshot of the stock’s fundamentals, while the momentum and EPS revisions grades tell you if the stock is gaining momentum.
So, if you are looking for value stocks, you just filter out all the stocks with a “Value” Grade of A or A+.
After that, you further research and analyze these value stocks one by one.
The advantage of Factor Grade is that you get a very quick idea of what type of stock it is. (e.g. a value stock? a growth stock? momentum stock?)
Here’s one of the best ways to make use of Seeking Alpha ratings.
Every day, Seeking Alpha publishes a list of stocks that earn top ratings from Seeking Alpha authors, Wall Street analysts, and its proprietary Quant System.
Personally, I think that just this list of Top-Rated Stocks is like a gold mine that could potentially help you increase your investment returns significantly.
Below is the performance comparison between Seeking Alpha’s Strong Buy Recommendations vs S&P 500.
As you can see, it outperformed S&P 500 by a large margin.
Now, how much does Seeking Alpha Premium cost?
- Basic: Free
- Seeking Alpha Premium:
$239/year$189/year - Seeking Alpha Pro: $2,400 per year
So, is it worth paying for Seeking Alpha Premium?
$189/year works out to be about $15.75/month (i.e. $0.53/day).
A cup of Starbucks coffee costs about $2.75.
Personally, I have been using Seeking Alpha Premium for my own stock research and analysis.
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