Encompass Health (EHC): Is the Zacks Rank #2 Upgrade a Reliable Buy Signal Amid Favorable Earnings Estimate Trends?

The recent Zacks Rank upgrade for Encompass Health (EHC) to a #2 (Buy) rating has sparked renewed interest among investors, positioning the stock in the top 20% of Zacks-covered equities based on earnings estimate revisions. However, conflicting reports-ranging from a #2 upgrade to a #3 (Hold) rating as of December 2025-highlight the need for a nuanced analysis of whether this signal reliably predicts near-term outperformance. This article examines the interplay between earnings estimate revisions, Zacks Rank methodology, and broader industry dynamics to assess the validity of the upgrade as a buy signal.

Zacks Rank and Earnings Estimate Revisions: A Predictive Framework

The Zacks Rank system, which has historically generated average annual returns exceeding 28% since 1988, relies heavily on the trajectory of earnings estimate revisions. For EHC, the Zacks Consensus Estimate for fiscal 2025 has risen by 0.7% over the past three months, reflecting growing analyst confidence. This upward trend places EHC in a favorable position within the Zacks framework, where stocks with consistent positive revisions are more likely to outperform.

A critical component of this framework is the Earnings ESP (Expected Surprise Prediction), a tool that combines Zacks Rank with predictive analytics to forecast earnings surprises. Research indicates that stocks with a Zacks Rank of #3 (Hold) or better and a positive Earnings ESP have a 70% probability of delivering positive earnings surprises. While EHC's current Zacks Rank is disputed with some sources citing a #3 rating, its Earnings ESP of +3.17% suggests a strong likelihood of exceeding expectations in its upcoming quarterly report. This duality-conflicting rank designations but consistent positive ESP-underscores the importance of integrating multiple metrics rather than relying solely on rank labels.

Industry Context and Strategic Positioning

EHC operates in the Zacks Medical - Outpatient and Home Healthcare industry, which holds a Zacks Industry Rank #55 and is in the top 23% of all industries. This sector is undergoing transformative shifts driven by telemedicine adoption and AI-driven healthcare solutions, with the global home healthcare market projected to grow at a 10.2% CAGR through 2030. EHC's strategic pivot toward increasing its Medicare Advantage (MA) payer mix-from 9.2% in 2018 to 16.5% by Q1 2025-aligns it with favorable demographic and regulatory trends.

However, the company faces headwinds, including staffing shortages and rising operational costs, which are endemic to the U.S. healthcare sector. These challenges could temper near-term growth, even as long-term industry tailwinds remain intact. For investors, the key question is whether EHC's operational adjustments and MA expansion can offset these pressures, a dynamic that earnings revisions and Zacks Rank aim to quantify.

Evaluating the Upgrade: Strengths and Limitations

The Zacks Rank #2 upgrade for EHC is primarily driven by its earnings estimate trajectory. Over the past year, EHC has outperformed its industry, gaining 16.6% compared to the sector's 7.2% growth. This outperformance, coupled with a Growth Style Score of B and a VGM Score of B which suggests strong fundamentals, suggests strong fundamentals. Yet, the discrepancy between a #2 (Buy) and #3 (Hold) rating as of December 2025 raises questions about the timing and consistency of analyst revisions.

Academic validation of Zacks Rank's predictive power remains limited, particularly for the #2 rating in the 2020–2025 period. While Zacks' proprietary data highlights a correlation between earnings revisions and stock price movements which is well-documented, peer-reviewed studies on the methodology's efficacy are sparse. This gap underscores the need for caution, as the Zacks model, like all predictive tools, is not infallible.

Conclusion: A Prudent Approach to the Buy Signal

The Zacks Rank #2 upgrade for EHC reflects a compelling case for near-term optimism, particularly given its favorable earnings revisions and industry positioning. However, investors should treat this signal as part of a broader due diligence process. The upgrade's reliability hinges on two factors: the sustainability of earnings estimate improvements and the company's ability to navigate operational challenges.

For those inclined to act, the current price target of $142.86-which implies no immediate re-rating-suggests that the market has already priced in much of the positive momentum. A more aggressive stance might be warranted if EHC's upcoming earnings reports confirm the upward trajectory of its estimates, as predicted by its Earnings ESP. Conversely, a delay in estimate revisions or a downgrade in the Zacks Rank could signal caution.

In a market environment where earnings momentum often drives short-term performance, the Zacks Rank #2 upgrade for EHC is a noteworthy signal. Yet, as with all investment decisions, it demands a balanced assessment of both quantitative metrics and qualitative risks.