Cognyte Software Ltd. (CGNT) could be a solid pick for investors given its recent upgrade to a Zacks Rank #1 (Strong Buy). An upward trend in earnings estimates – one of the most powerful forces impacting stock prices – has led to this rating change.
A company’s changing earnings picture is at the heart of the Zacks Rating. The system tracks the Zacks Consensus Estimate (the consensus measure of EPS estimates from the sell-side analysts covering the stock) for the current and subsequent years.
The power of a changing earnings picture in determining near-term stock price movements makes the Zacks rating system very useful for individual investors, as it can be difficult to make decisions based on rating upgrades by Wall Street analysts. These are usually caused by subjective factors that are difficult to see and measure in real time.
Therefore, the Zacks rating upgrade for Cognyte Software essentially reflects positivity about its earnings outlook, which could translate into buying pressure and an increase in its stock price.
The change in a company’s future earnings potential, as reflected in earnings estimate revisions, has been found to be highly correlated with the near-term price movement of its stock. That’s partly due to the influence of institutional investors who use earnings and earnings estimates to calculate the fair value of a company’s shares. An increase or decrease in earnings expectations in their valuation models simply results in a higher or lower fair value of a stock, and institutional investors typically buy or sell it. Their bulk investing action then leads to price movements for the stock.
For Cognyte Software, rising earnings expectations and the resulting rating upgrade fundamentally mean an improvement in the company’s underlying business. And investors’ appreciation for this improving business trend should push the stock higher.
Empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock movements. So it could really pay off if such revisions are followed when making an investment decision. This is where the proven Zacks Rank stock rating system plays an important role, as it effectively uses the power of earnings estimate revisions.
The Zacks Rank stock rating system, which uses four factors related to earnings expectations to categorize stocks into five groups ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), has an impressive outside-audited track record, with Zacks Rank #1 stocks generating an average annual return of +25% since 1988. You can see the complete list of the current Zacks #1 Rank (Strong Buy). stocks here >>>>.
