“Identifying The Average Zacks Rank For An Industry”

Kevin Matras shows how to pick the best industries by using the Zacks Rank, and a unique way to create tiebreakers when determining which stock is best! Read about it now and get three new stock picks from the three industries with the best average Zacks Rank.

Last week I wrote about a screen I was using that helped me identify the best performing sectors during the recent market sell-off. The item I was using was the relative percent price change over the last four weeks. The idea being that the sector(s) that showed the greatest resiliency should be the ones that will breakout first.

This week, I’m using the Zacks Rank to help me find the best industries; as you know, the Zacks Rank is one of the best ways to find stocks to outperform.

And since an industry is nothing more that a group of stocks in the same business, finding which groups have the best average Zacks Rank will help you pick stocks from a group that should outperform.

This screen adds a unique tiebreaking element to it as well.

Parameters

Screening for the best industries based on the Zacks Rank is actually quite easy. You’d set it up in the “calculation expression” feature, and it’d look like this: GrAgg117A(1*i192). Then you’d choose the operator: BotXIndA#3

That means we’re looking for the X industries (expanded industries) with the best average Zacks Rank. By saying “bottom three,” we’re looking for only the best three industries. (A Zacks Rank of 1 is better than a Zacks Rank of 5, so we use the “bottom” operator since the 1 is smaller than the 5.)

The Best Three X Industries this week (Sept. 4, 2007) were:

1. Engines - Int Combustion - average Zacks Rank of 1
2. Photo Equipment and Supplies - average Zacks Rank of 1.33
3. Fertilizers - average Zacks Rank of 1.50

(Feel free to expand your search to the best five or 10, or however many industries you choose.)

Next it’s time to narrow those industries down to find the best stocks within them. Here’s where the unique tiebreaker comes in. If I say give me the best two stocks in each industry based on the Zacks Rank, there may be several stocks that have a Zacks Rank of 1.

Since the Zacks Rank is an integer (whole number), you’ll need a way to break a potential tie. One way I do this is by multiplying the Zacks Rank with another item such as the price-to-sales ratio, or the P/E ratio.

Since I’m looking for the best (i.e. the smallest Zacks Rank), I’ll multiply it by a number where the smaller it is the better.

So if I multiply the Zacks Rank of 1 by a P/E ratio, the stock with a 1 (and the lower P/E ratio) will be chosen. Why? Because 1 X 18 = 18, whereas 1 X 32.6 = 32.6.

The Zacks Rank with the smaller multiplier will be selected. This works equally well with other items too—such as price-to-sales, price-to-book etc.

But since you’re looking for a small number, don’t (for example) multiply the Zacks Rank by a growth rate, or an item where the bigger number is better.

Why? Because a Zacks Rank of 1 times a growth rate of 100 percent is bigger than a Zacks Rank of 1 times a growth rate of 25 percent. So the result will be 100 vs. 25. But this will result in you getting the Zacks No. 1 with the lower growth rate—probably not what you intended. So multiply it by an item where the lower number is considered best.

The Zacks Rank multiplied by the P/E ratio would look like this in the “calculation expression” feature: i192 * i76

Then you’d select the operator: Bot#InXInd 2

Again, the bottom number in this example would be the best.

Here’s one stock from each of the best three industries:

1. Engines - Int Combustion - average Zacks Rank of 1
Best stock: CMI (Cummins) - value of 16.66

2. Photo Equipment and Supplies - average Zacks Rank of 1.33
Best stock: EK (Eastman Kodak) - value of 21.17

3. Fertilizers - average Zacks Rank of 1.50
Best stock: AGU (Agrium) - value of 21.79

Note: when the Zacks Rank is 1, the best stock will be decided by which multiplier is the lowest.

But if you’re comparing 1s and 2s (for example), if the 1 has a higher-enough multiplier than the 2, you may find that the Zacks Rank of 2 gets picked instead.

Try experimenting with different multipliers on your own, and see which work best for you. And don’t forget to back-test it to make sure it works!

Many screeners won’t let you screen for the top sectors or industries, and even fewer will let you combine items together to make your own. But in the Research Wizard you can.

Picking winning stocks has never been so easy—and now you can do it too!

Sign up for your two-week FREE trial to the Research Wizard today. Remember the key to successful screening is in discovering those screens that have produced profitable results in the past. And that’s exactly what you get with the powerful screening and back-testing ability of Research Wizard. You can do it! Try it today for free: http://researchwiz.zacks.com.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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