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Is Now a Good Time to Buy Stocks With Relative Price Strength?
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While the major indices are up from their mid-June lows, the gains have been cut by more than half over the last 3 weeks. The brief summer rally (from mid-June to mid-August) has all but evaporated as investors become highly concerned about a recession in the near future.
As it is, September is historically known as the worst-performing month on Wall Street. This year, the situation is more complicated as the Fed has to do a balancing act between combating inflation and maintaining the economy’s stability.
Considering the central bank’s goal of squashing inflation, another +75 bps hike is possible in just a couple of weeks. As such, trading is expected to be choppy as of now with the S&P 500 likely to stay rangebound. Risks stemming from recession fears, geopolitical tensions and dwindling liquidity may also lead to a rough road for equities.
In the current jittery market environment, for investors who might want to stay exposed to the equity setup, it is time to focus on good investment opportunities. One of the ways such potential plays could be identified is to look for signs of relative price strength.
Relative Price Strength Strategy
Earnings growth and valuation multiples are indeed important for investors to determine a stock's ability to offer considerable returns. But these are also essential for determining whether a stock’s price performance is better than its peers or the industry average.
If a stock’s performance is lacking that of the broader groups, despite impressive earnings growth or valuation multiples, then something must be wrong.
It’s always advisable to stay away from these stocks and bet on those that are outperforming their respective industry or benchmark. This is because betting on a winner always proves to be lucrative.
Then again, it is imperative that you determine whether or not an investment has relevant upside potential when considering stocks with significant relative price strength. Stocks delivering better than the S&P 500 for 1 to 3 months at least and having solid fundamentals indicate room for growth and are the best ways to go about this strategy.
Finally, it is crucial to find out whether analysts are optimistic about the upcoming earnings of these companies. In order to do this, we have added positive estimate revisions for the current quarter’s (Q1) earnings to our screen. When a stock undergoes an upward revision, it leads to additional price gains.
Screening Parameters
Relative % Price change – 12 weeks greater than 0
Relative % Price change – 4 weeks greater than 0
Relative % Price change – 1 week greater than 0
(We have considered those stocks that have been outperforming the S&P 500 over the last 12 weeks, four weeks and one week.)
% Change (Q1) Est. over 4 Weeks greater than 0: Positive current-quarter estimate revisions over the last four weeks.
Zacks Rank equal to 1: Only Zacks Rank #1 (Strong Buy) stocks — that have returned more than 26% annually over the last 26 years and surpassed the S&P 500 in 23 of the last 26 years — can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.
Current Price greater than or equal to $5 and Average 20-day Volume greater than or equal to 50,000: A minimum price of $5 is a good standard to screen low-priced stocks, while a high trading volume would imply adequate liquidity.
VGM Score less than or equal to B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.
Here are five of the 10 stocks that made it through the screen:
TFI International (TFII - Free Report) : TFI International provides a range of transportation and logistics services in North America. The 2022 Zacks Consensus Estimate for the Canada-based firm indicates 52.4% year-over-year earnings per share growth. TFII has a VGM Score of A.
TFI International beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of 30.3%, on average. TFII shares have lost around 8.5% in a year.
Otter Tail Corporation (OTTR - Free Report) : It is a regulated utility providing electricity to customers in Minnesota and both of the Dakotas. Otter Tail has a VGM Score of B. Over the past 30 days, Fergus Falls, MN-based OTTR saw the Zacks Consensus Estimate for 2022 move up 31.8%.
Otter Tail beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 31.4%. Valued at around $3.1 billion, OTTR has gained 33.8% in a year.
Ulta Beauty (ULTA - Free Report) : Based in Bolingbrook, IL, the company is a leading beauty retailer in the United States. ULTA’s expected EPS growth rate for three to five years is currently 11.9%, which compares favorably with the industry's growth rate of 11.4%. Ulta Beauty has a VGM Score of B.
Notably, ULTA beat the Zacks Consensus Estimate for earnings in each of the last four quarters. The company has a trailing four-quarter earnings surprise of roughly 32.8%, on average. Ulta Beauty shares have gone up 17.1% in a year.
Pure Storage (PSTG - Free Report) : Pure Storage provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. The fiscal 2023 Zacks Consensus Estimate for this Mountain View, CA-based firm indicates 38.9% year-over-year earnings per share growth. PSTG has a VGM Score of B.
Pure Storage beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 171.8%, on average. PSTG shares have gained 12% in a year.
JAKKS Pacific (JAKK - Free Report) : JAKKS Pacific is a multi-brand company that has been designing and marketing a broad range of toys and consumer products since 1995. The 2022 Zacks Consensus Estimate for the Santa Monica, CA-based firm indicates 88% year-over-year earnings per share growth. JAKK has a VGM Score of A.
JAKKS Pacific beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of 155%, on average. JAKK shares have gained 79.2% in a year.
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.
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.
Image: Bigstock
Is Now a Good Time to Buy Stocks With Relative Price Strength?
While the major indices are up from their mid-June lows, the gains have been cut by more than half over the last 3 weeks. The brief summer rally (from mid-June to mid-August) has all but evaporated as investors become highly concerned about a recession in the near future.
As it is, September is historically known as the worst-performing month on Wall Street. This year, the situation is more complicated as the Fed has to do a balancing act between combating inflation and maintaining the economy’s stability.
Considering the central bank’s goal of squashing inflation, another +75 bps hike is possible in just a couple of weeks. As such, trading is expected to be choppy as of now with the S&P 500 likely to stay rangebound. Risks stemming from recession fears, geopolitical tensions and dwindling liquidity may also lead to a rough road for equities.
In the current jittery market environment, for investors who might want to stay exposed to the equity setup, it is time to focus on good investment opportunities. One of the ways such potential plays could be identified is to look for signs of relative price strength.
Relative Price Strength Strategy
Earnings growth and valuation multiples are indeed important for investors to determine a stock's ability to offer considerable returns. But these are also essential for determining whether a stock’s price performance is better than its peers or the industry average.
If a stock’s performance is lacking that of the broader groups, despite impressive earnings growth or valuation multiples, then something must be wrong.
It’s always advisable to stay away from these stocks and bet on those that are outperforming their respective industry or benchmark. This is because betting on a winner always proves to be lucrative.
Then again, it is imperative that you determine whether or not an investment has relevant upside potential when considering stocks with significant relative price strength. Stocks delivering better than the S&P 500 for 1 to 3 months at least and having solid fundamentals indicate room for growth and are the best ways to go about this strategy.
Finally, it is crucial to find out whether analysts are optimistic about the upcoming earnings of these companies. In order to do this, we have added positive estimate revisions for the current quarter’s (Q1) earnings to our screen. When a stock undergoes an upward revision, it leads to additional price gains.
Screening Parameters
Relative % Price change – 12 weeks greater than 0
Relative % Price change – 4 weeks greater than 0
Relative % Price change – 1 week greater than 0
(We have considered those stocks that have been outperforming the S&P 500 over the last 12 weeks, four weeks and one week.)
% Change (Q1) Est. over 4 Weeks greater than 0: Positive current-quarter estimate revisions over the last four weeks.
Zacks Rank equal to 1: Only Zacks Rank #1 (Strong Buy) stocks — that have returned more than 26% annually over the last 26 years and surpassed the S&P 500 in 23 of the last 26 years — can get through. You can see the complete list of today’s Zacks #1 Rank stocks here.
Current Price greater than or equal to $5 and Average 20-day Volume greater than or equal to 50,000: A minimum price of $5 is a good standard to screen low-priced stocks, while a high trading volume would imply adequate liquidity.
VGM Score less than or equal to B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.
Here are five of the 10 stocks that made it through the screen:
TFI International (TFII - Free Report) : TFI International provides a range of transportation and logistics services in North America. The 2022 Zacks Consensus Estimate for the Canada-based firm indicates 52.4% year-over-year earnings per share growth. TFII has a VGM Score of A.
TFI International beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of 30.3%, on average. TFII shares have lost around 8.5% in a year.
Otter Tail Corporation (OTTR - Free Report) : It is a regulated utility providing electricity to customers in Minnesota and both of the Dakotas. Otter Tail has a VGM Score of B. Over the past 30 days, Fergus Falls, MN-based OTTR saw the Zacks Consensus Estimate for 2022 move up 31.8%.
Otter Tail beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 31.4%. Valued at around $3.1 billion, OTTR has gained 33.8% in a year.
Ulta Beauty (ULTA - Free Report) : Based in Bolingbrook, IL, the company is a leading beauty retailer in the United States. ULTA’s expected EPS growth rate for three to five years is currently 11.9%, which compares favorably with the industry's growth rate of 11.4%. Ulta Beauty has a VGM Score of B.
Notably, ULTA beat the Zacks Consensus Estimate for earnings in each of the last four quarters. The company has a trailing four-quarter earnings surprise of roughly 32.8%, on average. Ulta Beauty shares have gone up 17.1% in a year.
Pure Storage (PSTG - Free Report) : Pure Storage provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. The fiscal 2023 Zacks Consensus Estimate for this Mountain View, CA-based firm indicates 38.9% year-over-year earnings per share growth. PSTG has a VGM Score of B.
Pure Storage beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 171.8%, on average. PSTG shares have gained 12% in a year.
JAKKS Pacific (JAKK - Free Report) : JAKKS Pacific is a multi-brand company that has been designing and marketing a broad range of toys and consumer products since 1995. The 2022 Zacks Consensus Estimate for the Santa Monica, CA-based firm indicates 88% year-over-year earnings per share growth. JAKK has a VGM Score of A.
JAKKS Pacific beat the Zacks Consensus Estimate for earnings in each of the last four quarters. It has a trailing four-quarter earnings surprise of 155%, on average. JAKK shares have gained 79.2% in a year.
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.