The opinion of brokers is highly valued and much sought after by investors. This is because brokers have a clear insight into the nitty-gritty of the investment world. They attend company conference calls/presentations and scrutinize every detail available publicly before advising investors. Individual investors, more often than not, do not have access to such detailed and well-researched information.
Moreover, with a huge number of stocks flooding the market at any point of time, identifying a winning stock is akin to searching for ‘a needle in a haystack’. Hence, investors will be better off paying heed to the opinion of brokers while deciding the course of action (buy, sell or hold) on a particular stock.
Broker Ratings Hold the Key
Broker ratings are backed by sound logic and are by no means arbitrary. Since brokers closely follow the stocks in their coverage, they revise earnings estimates only after carefully examining the pros and cons of an event.
Naturally, when investors see brokers revising their estimates or recommendation on a stock, they often assume that there is something in the stock that has attracted analyst attention.In fact, a rating upgrade generally leads to stock price appreciation.
Similarly, the price of a stock may plummet following a rating downgrade. In the event of estimates moving south, which can happen due to lower-than-expected earnings/modest sales or pipeline failure (for a biotech company), investors tend to offload the stock from their portfolio.
Making the Most of Broker Opinions
By following broker actions, one can arrive at a winning portfolio of stocks. Keeping this in mind, we have designed a screen to shortlist stocks based on improving analyst recommendation and upward estimate revisions 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 been included. The price/sales ratio takes care of the company’s top line, making the strategy foolproof.
# (Up- Down Rating)/ Total (4 weeks) =Top #75 (This gives the list of the 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 $5 will not likely create significant interest for most investors).
Average Daily Volume greater than 100,000 shares over the last 20 trading days (Volume has to be significant to ensure that these are easily traded).
Market value ($ mil) = Top #3000 (This gives us stocks that are in 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:
Barnes & Noble, Inc., is a leading U.S. retail bookseller as well as a prominent retailer of content and educational products. Current year estimates for this Zacks Rank #3 (Hold) stock have surged 33.3% over the last 90 days to 56 cents.
The Woodlands, TX-based Conns Inc. (CONN - Free Report) is a specialty retailer, which currently operates retail locations in Texas and Louisiana. This Zacks Rank #1 (Strong Buy) company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the last four quarters by an average of 80.87%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Fiat Chrysler Automobiles NV (FCAU - Free Report) , based in the UK, operates as an international automotive company. It is engaged in designing, engineering, manufacturing, distributing and selling vehicles and components and production systems.The Zacks Rank #3 company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the last four quarters by an average of 22.48%.
California Resources Corporation (CRC - Free Report) , based in Los Angeles, CA, produces, gathers, processes and markets crude oil, natural gas, natural gas liquids and electricity primarily in its home state. The bottom line for this Zacks Rank #3 company is expected to grow 56.6% year over year whereas the industry average is only 27.3%.
Independent refiner and petroleum products marketer Alon USA Energy Inc. operates primarily in the Southwestern and South Central regions of the U.S. The company’s earnings are projected to grow 10% over the next three to five years, higher than the industry average of 8.2%. The company carries a Zacks Rank #3.
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.
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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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