The opinion of brokers acts as a valuable guide for investors in their course of action (buy, sell or hold) on a particular stock. In fact, a rating upgrade or downgrade by brokers has the potential to immediately influence the price of the stock.
Sell-side analysts, the most prevalent ones, are employed by brokerage firms to research on certain companies. They come up with information on various aspects of companies like their earnings performance, long-term growth prospects etc. and accordingly give their recommendations. Buy-side analysts are employed by hedge funds, mutual funds etc. while the independent ones simply sell their reports to investors. So, an analyst, irrespective of the type, does extensive research on the company(s) followed.
Why Broker Ratings are Important
Broker ratings do not come from the blue and are backed by sound logic. In fact, they have a lot more information on a company and its prospects than normal people as they not only scrutinize the publicly available financial documents but also attend company conference calls and other presentations.
Naturally, if investors see that brokers are improving their recommendations on a particular stock, they are more often than not inclined to believe that there is a catalyst behind it. For example, a company might have issued an improved earnings guidance based on some positive factors. This can well lead investors to follow brokers’ opinion on the same.
Before putting their hard-earned money into a stock, investors look at the earnings estimate revisions that serve as a guide to the direction of its price movement. Estimates can move north for a number of reasons – a bullish guidance, product launch or any favorable macro scenario. For example, if oil prices touch extreme lows then it is good for airline stocks. This causes analysts to adopt a bullish stance on such stocks and raise estimates. On the other side of the spectrum, analysts trim estimates if something negative concerning the company happens (say a pipeline failure can lead to estimates moving south for a biotech player, which might drag down its price).
Making the Most of What Analysts Say
We have designed a screen to shortlist stocks based on improving analyst recommendation and upward revisions to earnings estimates over the last four weeks. Also, since the price/sales ratio is a strong complementary valuation metric in the presence of analyst information, it has also been included. The price/sales ratio takes care of the company’s top line thereby making the strategy foolproof.
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 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 or Canadian stocks).
Here are five of the 10 stocks that made it through the screen:
Big Lots, Inc. ( BIG Quick Quote BIG - Free Report) : Based in Columbus, OH and founded in 1967, Big Lots is a broad-line closeout retailer in the United States. The stock has an impressive track record with respect to earnings, having outshined the Zacks Consensus Estimate in three of the last four quarters. The average beat is 8.54%. Fred's, Inc. FRED : Based in Memphis, TN and founded in 1947, Fred's sells its products through company-owned discount general merchandise stores and franchised Fred's stores.The FY 2017 Zacks Consensus Estimate for the stock is 29 cents, representing a growth rate of over 100% with respect to earnings per share over FY 2016. Next fiscal year’s average forecast is 38 cents, corresponding with 31.62% growth. Century Aluminum Co. CENX : Chicago, IL-based Century Aluminum is engaged in the production of primary aluminum in the U.S. and Iceland. The stock has outshined the Zacks Consensus Estimate in each of the last 2 quarters by 32.35% and 1.85% respectively. Allegheny Technologies Inc. Pittsburgh, PA-based Allegheny Technologies is a diversified specialty materials producer. Allegheny’s expected EPS growth rate for 3 to 5 years currently stands at 15%. ATI: Group 1 Automotive Inc. The company, headquartered in Houston, TX, is one of the leading automotive retailers in the world. The stock has an impressive track record with respect to earnings, having outshined the Zacks Consensus Estimate in 3 of the last 4 quarters. The average beat is 0.59%. GPI:
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 . Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »