3 Stocks with Strong Estimate Revisions

Pick a stock. Any stock. Now what is the one thing that would drive shares higher? Sure, you might say top line growth or better margins, but that just means higher earnings at the end of the day. Earnings continue to be the most powerful factor in a stock's price.

EPS and share price go hand in hand. Of course there are some anomalies out there, but the vast majority of stocks trade in the same direction of their earnings estimates, especially in the long run.

Revision Season

The fastest way to spark analyst activity is with a quarterly report. While the earnings steal all the headlines, it really only helps those already invested. When looking at a new position, those subsequent estimate revisions should be the focus.

After all the market is a forward looking mechanism.

As this earnings season winds down, we can take a step back from the headlines and see which companies should benefit the most moving forward, via upward estimate revisions.

Stocks Analysts Love

There are 101 other things to look at when choosing an investment, but most boil down to the bottom line. So here are a few stocks that should see higher share prices given their recent earnings estimate revisions.

Lithia Motors (LAD - Snapshot Report) posted its sixth consecutive earnings surprise on Oct 26 and that was quickly followed up with a round of estimates revisions.

All 4 analysts polled by Zacks raised their EPS targets for 2011 and 2012. This year's average estimate is up 17 cents, to $1.88. Next year's consensus rose 12 cents, to $2.04. That puts growth rates at 99% this year and another 9% in 2012.

Here is a 5-year chart with the Zacks Consensus Estimates represented by the colored lines and the share price in black. You can see the upward estimates, particularly in the 2011 consensus (the blue line). A few years ago you can see the pattern towards the downside as well.

It is not going to be in lockstep but shares respond well for this Zacks #1 Rank (Strong Buy).

Arctic Cat (ACAT - Snapshot Report) is a prime example. Estimates up, stock up. Estimates down, stock down.

After ACAT reported, also in late October, analysts unanimously raised estimates. The fiscal 2012 consensus jumped 15 cents, to $1.15 for a growth rate of 64%. Next year's rose 14 cents, to $1.30 for a growth ate of 14%.

Surging estimates have given ACAT fantastic valuations, even after a spike in share price. The forward P/E is about 18 times, which puts the PEG ratio near 0.8.

Kennametal Inc. (KMT - Snapshot Report) saw a rush of upward estimates revisions in the past 2 weeks thanks to its earnings release.

The consensus estimate for this year rose 12 cents, to $3.72. Next year's is up 8 cents, to $4.16. That puts growth rates at 25% and 12%, respectively.

But, even though earnings have risen, the share price seems a bit slower to react. Take a look at the disparity between the consensus and the share price in the chart below. Now could be a good time to take advantage and get into KMT.

The Power of Estimate Revisions

There are still plenty of other outside factors the go into the direction of a stock on any given day. Be it the market sentiment, economic data, or individual company news.

But, earnings estimate revisions have proven time and time again to be the best indicator of future performance. We are coming out of a very interesting earnings season, which produced thousands of revisions. Now is the time to dig in and find some great opportunities.

Bill Wilton is the Aggressive Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor service

Read the full analyst report on KMT

Read the full analyst report on ACAT

Read the full analyst report on LAD