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The One Trigger That Consistently Predicts Explosive Gains

The price action in the stock market this year has illustrated how important it is to remain disciplined and follow a rule-based strategy. As nearly every Wall Street analyst was calling for lower stock prices in 2023 (along with an impending recession), it paid to ignore the noise and listen to what the market and individual stocks were telling us.

A strategy that is mainly mechanical can free investors from emotional decision-making. Emotions can prevent investors from making sound decisions and are one of our biggest threats to achieving a considerable rate of return on our investments.

Rule-based strategies remove the reliance of making decisions based on predictions or guesswork. Investing using a clear set of rules allows investors to follow a disciplined approach. And here at Zacks, we provide our subscribers with a rule-based strategy that has consistently outperformed the market year after year.

How to Predict Explosive Gains

At the heart of this strategy is the Zacks Rank, which analyzes earnings estimate revisions. These earnings revisions have been shown to be the most powerful force impacting stock prices. Only the top 20% of all stocks that are experiencing the most substantial revisions are ranked as either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).

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Stocks with rising estimates have significantly outperformed the S&P 500. In fact, based on a recent 34-year study, a portfolio of Zacks Rank #1 (Strong Buy) stocks beat the market with an average annual return of over 25% per year – more than double that of the S&P’s 11.1%.

That’s why it is so crucial to keep an eye on which stocks are ranked favorably by the Zacks Rank system. Let’s take a look at a current example in today’s investment climate.

A Zacks ‘Strong Buy’ and Consistent Outperformer

Unum Group UNM provides financial protection benefits solutions primarily in the United States, the United Kingdom, and Poland. UNM provides group long-term and short-term disability, group life, and accidental death and dismemberment products. The company also offers cancer and critical illness, dental and vision, group pension, and voluntary life insurance products.

UNM is ranked as the leading disability income writer and second-largest writer of voluntary business in the United States. The company sells its products through field sales personnel, independent brokers, consultants, and independent contractor agencies.

UNM is part of the Zacks Insurance – Accident and Health industry, which is currently ranked in the top 8% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months. Also note the favorable characteristics for this industry below:

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Quantitative research studies have shown that approximately half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on the top stocks within leading industry groups, we can dramatically improve our odds of success.

A History of Earnings Beats and Improving Forecasts

UNM has built up an impressive earnings history, surpassing earnings estimates in three of the last four quarters. Last month, the company reported first-quarter earnings of $1.87/share, a 13.33% surprise over the $1.65 consensus estimate. UNM has delivered a +18.61% average earnings surprise over the last four quarters.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

In a sign of strength, analysts covering the insurance company have increased their full-year EPS estimates by +11.23% in the past 60 days. The 2023 Zacks Consensus EPS Estimate now stands at $7.43/share, reflecting potential growth of 19.7% relative to last year. It’s exactly the type of trend we want to look for when narrowing down our list of potential stocks.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

What the Zacks Model Unveils

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently seen positive earnings estimate revision activity. The idea is that this recent information can serve as a more accurate predictor of the future, which can give investors a leg up during earnings season.

The technique has proven to be quite useful in finding positive surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks delivered a positive surprise 70% of the time according to our 10-year backtest.

UNM is a Zacks Rank #1 (Strong Buy) and boasts a +1.17% Earnings ESP. Another beat may be in the cards when the company reports its Q2 results.

Disclosure: UNM is a holding in the Zacks Income Investor portfolio.

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Zacks Investment Research