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5 Stocks in the Limelight After Recent Broker Rating Upgrade

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The second-quarter reporting cycle, which is almost over, has unveiled an extremely rosy picture. With only a handful of companies left to report, the season is expected to end on a high, displaying significant earnings growth. Apart from recording bottom-line growth on a year-over-basis, a high proportion of companies have reported better-than-expected earnings per share.

Generally, earnings beat leads to stock price appreciation. Given this favorable background, investors like to add outperformers to their portfolios as they strive to design a portfolio of stocks that will fetch them handsome returns.

However, the task is easier said than done. This is because the investing world is fraught with uncertainties and stock prices are sensitive to recent developments. Additionally, the same group of stocks may not work under all circumstances.

For example, airline stocks may benefit from declining oil prices but may fall out of favor in the event of oil prices moving up. One of the well-accepted strategies to brave market uncertainties is to maintain a well-diversified (i.e. include stocks from different industries) portfolio.

What is the Way Forward?

Given this backdrop, it is in the best interest of investors to seek guidance from “experts in the field”. The concerned experts are brokers. The opinion of brokers acts as a valuable guide for investors while deciding their course of action (buy, sell or hold) on a particular stock. Broker ratings are backed by sound logic. They have deeper insight into the happenings of a particular company as they directly communicate with management.

They undertake extensive research on the company’s publicly available financial statements apart from attending conference calls. In a bid to deepen their understanding of a particular stock, they sometimes converse with customers to find out their likes/dislikes about the products and services offered by the company.

In view of their expertise, it is prudent for investors to pay heed to broker advice while formulating their investment strategy. Of the three types of brokers/analysts (sell-side, buy-side and independent) present in the investment world, sell-side analysts are most common. Various brokerage firms employ them to provide unbiased opinion to investors after thorough research. Buy-side analysts are employed by hedge funds, mutual funds etc. while the independent ones simply sell their reports to investors.

Earnings Estimate Revisions – An Useful Guide

As indicated above, brokers follow stocks in their coverage minutely. They revise their earnings estimates on a stock after carefully examining the pros and cons of an event for the concerned company. All the decisions by brokers are backed by solid logic or justification and thus estimate revisions serve as an important pointer regarding the price of a stock.

For instance, an earnings outperformance by a company generally leads to upward estimate revisions with prices moving north. Similarly, lackluster bottom line results often lead to stock price depreciation. Investors tend to be guided by the direction of estimate revisions and stock price while formulating their investment strategy. To take care of the earnings performance, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.

Revenue Performance Not to be Ignored

While we have talked about the bottom line in detail, the revenue performance should not be overlooked. Actually, according to many market watchers a revenue beat is more creditable for a company than a mere earnings outperformance.

To address top-line concerns, we have included in our screen the price/sales ratio, which serves as a strong complementary valuation metric.

Screening Criteria

# (Up- Down Rating)/ Total (4 weeks) =Top #75 (This gives the list of top 75 companies that have witnessed net upgrades over the last 4 weeks).

% change in Q (1) est. (4 weeks) = Top #10 (This gives the top 10 stocks that have witnessed earnings estimate revisions over the past 4 weeks for the upcoming quarter).

We have also added the following screening parameters to ensure that the strategy is a winning one:

Price-to-Sales = Bot%10 (The lower the ratio the better, companies meeting this criteria are in the bottom 10% of our universe of over 7,700 stocks with respect to this ratio).

Price greater than 5 (as a stock trading below $5 will not likely create significant interest for most of the investors).

Average Daily Volume greater than 100,000 shares over the last 20 trading days(Volume has to be significant to ensure that these are easily traded).

Market value ($ mil) = Top #3000 (This gives us stocks that are the top 3000 in terms of market capitalization).

Com/ADR/Canadian= Com (This takes out the ADR and Canadian stocks).

Here are five of the 10 stocks that made it through the screen:

Archer Daniels Midland Company (ADM - Free Report) is one of the leading food processing companies in the world. This Illinois-based company procures, transports, stores, processes, and merchandises agricultural commodities and products. The company sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for current-quarter earnings improved 18.5% over the last 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dillard's Inc. (DDS - Free Report) is a large departmental store chain featuring fashion apparel and home furnishings. The company carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for current-year earnings improved 3.6% over the last 60 days.

Delek US Holdings, Inc. (DK - Free Report) is an independent refiner, transporter and marketer of petroleum products. This Zacks Rank #3 company is based in Brentwood, TN. The company has an impressive history with respect to earnings per share. It outshined the Zacks Consensus Estimate in three of the trailing four quarters, with an average beat of 92.6%.

Bunge Limited (BG - Free Report) is an integrated global agribusiness and food company spanning the farm-to-consumer food chain. This Zacks Rank #3 company is based in White Plains, NY. The Zacks Consensus Estimate for current-quarter earnings improved 26.1% over the last 60 days.

Beazer Homes USA, Inc. (BZH - Free Report) designs, builds and sells single family homes and carries a Zacks Rank #3. The company has an impressive history with respect to earnings per share. It outshined the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat in excess of 100%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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