Yelp (YELP) has emerged as an attractive investment opportunity after being upgraded to a Zacks Rank #1 (Strong Buy). This upgrade reflects a positive shift in earnings estimates, a key driver of stock prices. The Zacks rating system is based on the consensus of analysts’ estimates for a company’s future earnings, which is a powerful indicator of its financial health.
The system’s strength lies in its objectivity. Unlike Wall Street analysts who often make subjective recommendations, the Zacks Rank relies on measurable data, making it a valuable tool for individual investors. When a company receives a Zacks Rank upgrade, it essentially signifies an optimistic outlook on its earnings potential.
The relationship between earnings estimates and stock prices is well-established. Institutional investors heavily rely on earnings data to determine a company’s fair value. When analysts increase their earnings estimates, it suggests a stronger financial outlook, leading to a higher fair value and encouraging institutional investors to buy the stock. This buying pressure drives up the stock’s price.
In Yelp’s case, the rising earnings estimates and consequent Zacks Rank upgrade signify a positive shift in its underlying business. As investors recognize this improvement, the stock is expected to experience upward pressure.
The Zacks Rank system has a proven track record. It classifies stocks into five groups based on four factors related to earnings estimates, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). Over the years, Zacks Rank #1 stocks have consistently generated impressive returns, averaging an annual gain of +25% since 1988.
For the fiscal year ending December 2024, Yelp is projected to earn $1.65 per share, representing a 22.2% increase from the previous year. Analysts have steadily raised their estimates for Yelp, with the Zacks Consensus Estimate increasing by 18.4% over the past three months.
Unlike other rating systems, the Zacks Rank maintains a balanced distribution of ‘buy’ and ‘sell’ ratings. Only the top 5% of Zacks-covered stocks receive a ‘Strong Buy’ rating, and the next 15% get a ‘Buy’ rating. Therefore, Yelp’s placement in the top 20% indicates its strong earnings estimate revision trend, making it a prime candidate for achieving market-beating returns in the near term.
With its upgrade to a Zacks Rank #1, Yelp joins the elite group of stocks with the most favorable earnings outlook. This positions the company for potential growth and suggests that the stock could experience upward movement in the near future.
