Buying a quality stock during a pullback can be extremely lucrative for an investor. But it can be all the more profitable if the market has overlooked the name. That's the idea behind our “Underfollowed Gems” premium screen.
On average, an S&P stock is covered by 14 analysts. So if a name is only being followed by a fraction of that number, it hasn't attracted the full attention of the market. But it will! And if that stock is a Zacks Rank #1 (Strong Buy) or #2 (Buy), it means the market is missing out on a company with rising earnings estimates. It won't miss out for long, and the share price will appreciate as more and more analysts realize what they've been missing.
Below, you'll find three Zacks Rank #1s that are underfollowed. The few analysts that are watching these companies have raised their earnings estimates after solid quarterly reports. When the market takes its next leg higher and analysts are less defensive, these stocks may be among the biggest beneficiaries. For the full list and the screen's parameters, make sure to click the link above.
CSX Corporation (CSX - Free Report)
These are good days for railroads. A thriving and improving economy means more and more goods are crossing the country on the rails, which explains why this space has an enviable position in the top 14% of the Zacks Industry Rank with the 35th spot out of 256. The space is up by more than 11% this year…but CSX Corporation (CSX - Free Report) has surged nearly 4X that much so far in 2017! This major provider of rail-based transportation has new management and its really paying off as shares have soared a little more than 40% year-to-date. Now just think what this company can do if Washington gets its act together and passes some pro-growth measures, such as infrastructure spending.
The company’s first quarter report last month continued an impressive streak of earnings beats that stretches back to a rare miss in February of 2014. That comes to 13 straight positive surprises. Earnings per share of 51 cents topped the Zacks Consensus Estimate by 18.6% and improved from last year by 37.8%. Over the past four quarters, CSX has put together an average surprise of a little more than 8%. Revenue improved 10% to $2.9 billion, which was also ahead of our expectations at $2.7 billion. The company enjoyed volume growth across most markets, but one of the more encouraging trends was the 31% improvement in coal revenue. Coal accounts for over 15% of revenues for railroads in this country, and President Trump is a much bigger fan of the energy source than was his predecessor.
Now with 12 estimates making up the Zacks Consensus Estimate for this year and next, CSX barely fits the parameters of this screen. However, for a railroad company of its size, you'd think it would be better followed. Just like its share price, earnings estimates for CSX have been moving higher all year. The Zacks Consensus Estimate for this year is $2.29, which is up 8% in the past 30 days as 10 of 12 covering analysts revised higher. It’s also up 13.4% over three months. The Zacks Consensus Estimate for next year is currently expected to improve more than 19% from 2017 to $2.73. The estimate has advanced 11% in the past month and 21.3% in three months. No analysts have downgraded their expectations for either period.
Western Digital (WDC - Free Report)
It’s been a great four quarters for data storage company Western Digital (WDC - Free Report) , which is enjoying “a healthy market environment with good demand for all NAND based products, as well as for capacity enterprise and client hard drives”. So how good is the industry? Computer – storage devices is in the top 6% of the Zacks Industry Rank with the 16th spot out of 256…and WDC is making the most of this position. The company has amassed an average surprise of 13.5% over the past four quarters and has advanced 27.5% year to date, which is better than its highly-ranked industry at 15.7%.
Not only did WDC beat the Zacks Consensus Estimates for earnings and revenue in its fiscal third quarter report late last month, but it's impressive year-over-year growth shows just what kind of a run this company is on. WDC earned $2.07 per share in the quarter, which topped the Zacks Consensus Estimate of $1.85 by 11.9% and soared from last year by 71%. Revenue was just as noteworthy at $4.65 billion, or 65% better than last year and ahead of our expectations at $4.54 billion. Strong demand for hard drives as well as NAND-based products from all categories of customers led to these results.
The Zacks Consensus Estimate for this year (ending next month) is composed of only four estimates and next year (ending June 2018) has only two, so the market doesn’t seem to be fully aware yet of this company’s comeback. Right now, we are expecting $7.69 for this fiscal year, marking a 9.4% advance from 30 days ago. Next fiscal year, which begins in July, is shaping up to be even more remarkable as it continues to benefit from the shift to non-PC applications, digital data growth and growing exposure to smaller business spaces. The Zacks Consensus Estimate of $10.58 increased 34.4% from a month ago and suggests a year-over-year increase of 37.6%.
Applied Optoelectronics (AAOI - Free Report)
Entering today’s session, shares of Applied Optoelectronics (AAOI - Free Report) are up 171% so far in 2017. But this fiber-optic device maker isn’t taking a break. The stock was up more than 11% as of this writing (May 22) after receiving a “Strong Buy” rating from a brokerage. Well, we’ve had AAOI at a Zacks Rank #1 for a while now, and it looks like rest of the market may just be starting to catch up. That makes AAOI a perfect example for this screen. Presently, there are only 4 estimates accounting for this year’s Zacks Consensus Estimate, and only half that much for next year. You can bet that will change in the near future as this company continues its impressive momentum.
Earlier this month, AAOI reported the highest earnings and revenue in its history during the first quarter. Earnings per share of $1.02 beat the Zacks Consensus Estimate by nearly 7.4%, while total revenue of $96.2 million nearly doubled year over year (+91%). Much of this success can be attributed to its Internet data centers end market. AAOI has beaten the Zacks Consensus Estimate for five straight quarters now, which corresponds with that sharp upward trajectory of late that you can see in its graph below. For the current quarter (Q2), it expects revenue to hit a new record of between $106 million and $112 million with earnings per share of $1.09 to $1.19.
Earnings estimates have been as dramatic as its share price. The Zacks Consensus Estimate for this year is at $4.32, or 14.9% better than a month ago. Next year’s estimate is currently 16% higher at $5.01, which has advanced 23.7% in 30 days. Over the past three months, the Zacks Consensus Estimates have taken off by 142.7% for 2017 and 211% for 2018.
Zacks' 2017 IPO Watch List
Before looking into the stocks mentioned above, you may want to get a head start on potential tech IPOs that are popping up on Zacks' radar. Imagine being in the first wave of investors to jump on a company with almost unlimited growth potential? This Special Report gives you the current scoop on 5 that may go public at any time.
One has driven from 0 to a $68 billion valuation in 8 years. Four others are a little less obvious but already show jaw-dropping growth.
Download this IPO Watch List today for free >>