Pearson PSO, an education services company and publisher, has recently received a significant upgrade to a Zacks Rank #2 (Buy), making it an attractive investment prospect. This upgrade primarily reflects an upward trend in earnings estimates, a crucial factor influencing stock prices.
The Zacks Rank is a powerful stock rating system that relies solely on a company’s changing earnings picture. It tracks the consensus of earnings per share (EPS) estimates from analysts covering the stock. The system has proven to be highly effective in predicting near-term stock price movements, as it captures the influence of earnings revisions on investor behavior.
The Power of Earnings Estimates
The key to the Zacks Rank’s success lies in its understanding that changes in a company’s future earnings potential, as reflected in earnings estimate revisions, are strongly correlated with its stock price. Institutional investors, who heavily influence market movements, rely on earnings and earnings estimates to determine a company’s fair value. An increase in earnings estimates leads to a higher fair value, prompting institutions to buy more shares, driving the stock price up.
For Pearson, rising earnings estimates and the consequent Zacks Rank upgrade signal a positive shift in the company’s fundamental business outlook. Investors recognize this improvement, which ultimately pushes the stock price higher.
Zacks Rank System: A Proven Methodology
Extensive empirical research has demonstrated a strong correlation between trends in earnings estimate revisions and near-term stock movements. The Zacks Rank system effectively harnesses this power by categorizing stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). The system considers four factors related to earnings estimates and boasts an impressive track record, with Zacks Rank #1 stocks generating an average annual return of +25% since 1988.
Earnings Outlook for Pearson
Analysts are expecting Pearson to earn $0.80 per share for the fiscal year ending December 2024, representing a 9.6% year-over-year increase. Notably, analysts have been consistently raising their estimates for Pearson. Over the past three months alone, the Zacks Consensus Estimate for the company has increased by 1.9%.
A Reliable Indicator
Unlike subjective Wall Street analyst ratings that often favor optimistic recommendations, the Zacks Rank system maintains an equal proportion of ‘buy’ and ‘sell’ ratings across its vast universe of over 4,000 stocks. Only the top 5% of Zacks-covered stocks receive a ‘Strong Buy’ rating, with the next 15% getting a ‘Buy’ rating. Therefore, Pearson’s placement within the top 20% of Zacks-covered stocks underscores its strong earnings estimate revision feature, making it a compelling candidate for outperforming the market in the near term.
The upgrade of Pearson to a Zacks Rank #2 positions it among the top 20% of Zacks-covered stocks in terms of estimate revisions, suggesting that the stock could move higher in the near future.
