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Zacks Indicator  Estimate Revision Model What is the Zacks Indicator? The Zacks Indicator is a proprietary fundamental stock selection model which predicts stock price movements based on estimate revisions and EPS surprises. Its raw inputs are daily estimates from over 250 brokerage firms and daily earnings surprises. In addition to selecting attractive purchase candidates, the Indicator can be used to sell, avoid, or "short" stocks. A Proven Performer The Indicator has consistently produced excess returns over the last 20 years. Annualized returns of the Indicator's top 10% (approx. 500 stocks) over this period were 31.8% versus an S&P 500 return of 17.4% (Returns include price changes and dividends, but no transaction costs). Methodology There is a strong empirical relationship between the direction of recent estimate revisions and earnings surprises and subsequent price movement. The Indicator measures revision and surprise activity from several different perspectives to produce the most accurate predictions of future price response. The Indicator is a ranking system that identifies groups of stocks whose average returns are predicted to be higher than the equal weighted universe over the next three months. The model ranks 5,000 stocks into 99 uniform groupings (e.g., 1 = best, 99 = worst). The Indicator's rankings are continually updated when a stock receives downward earnings estimate revisions from an analyst, negative earnings announcements from the company, reports a quarter below estimate, or when there is declining estimate revision momentum. FAQ Q. How Does the Indicator Really Work? A. It predicts estimate revisions and since price changes parallel revisions, it predicts price changes. Q. That's Impossible - Predicting Revisions is Equivalent to Forecasting EPS More Accurately than the Consensus. A. That's exactly what we've done. The first revision is rarely the last revision, and the most recent estimates are the most accurate estimates. We have used this information to create an EPS forecast that is more accurate than the consensus. Q. What is the Theoretical Basis for the Indicator? A. Changes in investor expectations are the primary cause of changes in stock prices. Estimate revisions reflect these changing expectations. The Indicator predicts the direction and magnitude of future estimate revisions and consequently, predicts future relative stock price movements. Q. Is This a Market Anomaly? A. Yes. The market is not efficient with respect to revisions. We believe the information in revisions takes 30 to 90 days to become fully reflected in stock prices. We help this process take place by distributing consensus revision statistics to retail brokers and individuals through Quotron, Reuters, ADP, Dow Jones News and 25 other information vendors. Q. Why Does Zacks Indicator Work So Well? A. The Indicator's exceptional track record is due in a large part to the unique data used in formulating the Indicator. In Zacks historical estimate database, estimate revisions are correctly dated as of the date they were disseminated; consequently we can accurately relate revisions and stock price changes. Moreover, we are the only firm that consistently removes extras from both analysts' EPS forecasts and actual EPS; consequently Zacks EPS surprises are more directly associated with price changes. Q. How is the Indicator Used? A. The Zacks Indicator has been used by institutional investors for nearly 15 years. The most common use of the Indicator is as an overlay to a primary stock selection strategy. Options for using the Indicator as an overlay include using it as a: Component of a multi-factor model Screen for new purchase candidates Tie-breaker to pick among equally attractive purchase candidates Tie-breaker to pick among stocks in an industry group, or Sell discipline for stocks currently held. The Indicator can also be used as the core strategy for a specialized equity fund, for option and option spread valuation, and to predict industry or sector performance. Q. What is the Time Horizon of the Indicator's Predictive Power? A. The Indicator's optimal time horizon is 1-6 months. For most money managers, the Indicator's relatively short horizon makes it more of a timing tool than a method of picking long-term outperformers. Q. Will the Indicator Work in Our Universe? A. Your Zacks Account Manager will be happy to run a backtest of the Indicator within your universe. If you prefer to backtest the Indicator yourself, the Indicator scores and returns are available either on tape or as a data item in the historical databases available with Zacks Research System. Q. Why Should We Use the Zacks Indicator Instead of Building our Own? A. You can save time and money. Given Zacks' access to data, software, and Zacks' 15 years of research experience on this subject, it is unlikely that you will be able to build a better model without devoting at least 1 to 2 man-years to the project. If you would like to try, we can get you started. Q. Is the Indicator Correlated with Other Models? A. We have tested most models and can say, generally, no. Q. If We Already Have a Revision Model, Why Should We Consider the Indicator? A. The Indicator may outperform or enhance your model. Ask your Zacks Account Manager for a copy of the Indicator performance statistics diskette which you can use to compare your model's performance with the Indicator's. Q. If the Indicator Is So Good, Why Don't You Use It Yourself? A. We use the Indicator in a limited partnership hedge fund targeted to individuals. Q. Don't You Then Compete With Us? A. No, we do not sell our fund to ERISA clients. Q. Performance Numbers Can Be Deceptive. How are Your Numbers Calculated? A. Our top 2%, top 5% and all other portfolios are based on Indicator scores available to clients at the time the portfolios are formed. Our performance benchmark is the equally-weighted return of the entire Indicator universe, and our benchmark returns are calculated using the same methodology as our Indicator scores. Disclaimer: It is important to note that the Indicator is a relative ranking tool only. It is not an absolute valuation tool. The Indicator does not measure real or absolute value; instead, it predicts changes in relative market valuation.

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