We’ve all heard the old adage that 50% of a stock’s price movement can be attributed to the group that it’s in.
In fact, studies have shown that just getting into an average stock in a strong industry is likely to outperform a great stock in a poor industry.
Of course, this does not mean that you can just pick any stock in a top group and expect to make money. But, it does underscore the importance of sticking with the best industries.
If your last losing stock was in a poorly performing industry, the odds of success were against you the entire time.
But identifying the best stocks in the best industries is easy to do. And the Zacks Industry Rank is the ideal way to do that so you can put the odds of success in your favor on your very next trade.
Zacks Industry Rank
As you know, since 1988, the Zacks #1 Rank stocks have generated an average annual return of over 26% per year. That’s nearly 3 times the S&P 500. And it’s beaten the market in 23 of the last 26 years.
That’s because the Zacks Rank is based on the most powerful force impacting stock prices, which is earnings estimate revisions.
The Zacks Rank is also one of the best ways to rank industries. And this is done with the Zacks Industry Rank. After all, since an industry is nothing more than a group of stocks in a similar business, this is the perfect way to size up an industry.
The Zacks Industry Rank is determined by calculating the average Zacks Rank for all of the stocks in the industry and then assigning an ordinal rank to it. For example, an industry with an average Zacks Rank of 1.6 is better than an industry with an average Zacks Rank of 2.3. So the industry with the better average Zacks Rank would get a better Zacks Industry Rank.
Zacks classifies all stocks into 1 of 265 expanded (aka ‘X’) Industries. The average Zacks Rank is calculated for every industry every day. So, if an industry has the best average Zacks Rank, it would be considered the top industry (1 out of 265), which would place it in the top 1% of Zacks Rank Industries.
The top 132 Zacks Ranked industries would be in the top 50% of industries, whereas the bottom 133 Zacks Ranked Industries would be in the bottom 50% of industries.
If an industry had a poor average Zacks Rank, it might be ranked 220th out of 265 industries, thus placing it in the bottom 17% of Zacks Rank Industries.
Putting the Zacks Industry Rank to the Test
To further illustrate the importance of picking stocks in the best industries, and how the Zacks Industry Rank is one of the best ways to do this, take a look at the test results and charts below.