As the second-quarter reporting cycle gets underway, investors would look to add stocks that have the potential to surpass earnings expectations in the quarter. This is because an earnings beat generally leads to stock price appreciation.
Investors, after all, are driven by the sole objective of generating handsome returns from their portfolio. None of them want their hard-earned money to go down the drain.
However, the task of including potential outperformers in one’s portfolio is not an easy one. In fact, equity market tricks are not easy to master with a deluge of stocks flooding the space at any point of time. The task becomes even more daunting when one tries to select a winning portfolio without proper guidance. Given time constraints, it is in the best interest of investors to be guided by experts in the field.
Seek Broker Advice
The concerned experts are brokers. Generally, three types of brokers (sell-side, buy-side and independent) are present in the investment world, with sell-side analysts being most common. They are employed by various brokerage firms to provide unbiased opinion to investors on the stocks under their coverage after thorough research. Buy-side analysts are employed by hedge funds, mutual funds etc. while the independent ones simply sell their reports to investors. Brokers, irrespective of their types, do intense research on stocks in their coverage before coming up with recommendations.
Brokers/analysts attend company conference calls/presentations and scrutinize every detail available publicly before advising investors about their course of action (buy, sell or hold a stock).
Be Guided by Earnings Estimate Revisions
Brokers arrive at their recommendation on a stock after thoroughly analyzing the nitty-gritty. Therefore, it is natural for investors, on seeing brokers improve their recommendation on a particular stock, to believe that there is a solid reason/logic behind it. In fact, a rating upgrade generally leads to stock price appreciation. Similarly, the price of a stock may plummet following a rating downgrade.
Estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario. 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 is Important
While we have talked about the bottom line in detail, the top line (revenue portion) cannot be ignored. Actually, according to many market watchers a revenue beat is more creditable for a company than a mere earnings outperformance, especially in an environment of revenue weakness due to macroeconomic headwinds like a strong dollar or lackluster demand for travel (which will hurt travel-focused companies).
To address top-line concerns, we have included in our screen the price/sales ratio, which serves as a strong complementary valuation metric.
# (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.
To ensure that the strategy is a winning one, covering all bases, we have added the following screening parameters:
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: 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 the top 3000 if one judges by 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:
Dean Foods Company (DF - Free Report) , based in Dallas, TX, is a leading processor and distributor of milk and other dairy products in the U.S. as well as a leading manufacturer of various specialty food products. This Zacks Rank #3 (Hold) company has a healthy 11% expected EPS growth rate for 3–5 years.
Barnes & Noble, Inc. , is a leading U.S. retail bookseller as well as a prominent retailer of content and educational products. Earnings per share for the current year are projected to increase 30.23% on a year-over-year basis. The company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Brentwood, TN-based Brookdale Senior Living Inc. (BKD - Free Report) is a leading owner and operator of senior living facilities throughout the United States. Currently, the company has a Zacks Rank #3 and an expected EPS growth rate of 13% for the next 3–5 years.
Dillard's Inc. ((DDS - Free Report) ) is a large departmental store chain featuring fashion apparel and home furnishings. The Zacks Consensus Estimate for the current quarter has increased 1 cent to 10 cents per share over the last month. The stock carries a Zacks Rank #3.
Plains GP Holdings, L.P. (PAGP - Free Report) , through its subsidiaries, is involved primarily in the transportation, storage and marketing of crude oil and refined products. The Zacks Consensus Estimate for this Zacks Rank #3 stock has increased 2 cents to 24 cents per share over the last seven days.
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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