The U.S. equity market has been subdued due to domestic as well as international factors. Concerns pertaining to recent actions of the Trump administration, havoc wreaked by Harvey and the North Korea-Japan tensions have kept markets on the edge.
However, investors, irrespective of the current scenario, are on the lookout for stocks that would fetch them handsome returns. They are, after all, spending their hard-earned money in the stock market and would not want the amount to go down the drains. Maintaining a well-diversified portfolio (selecting stocks from different industries) is a tried and tested strategy to tackle the uncertainties and get handsome returns.
The task is, however, easier said than done. With a deluge of stocks flooding the market at a particular point of time, one needs to have thorough understanding of the nitty-gritty associated with investing, to select appropriate stocks for his/her portfolio. Given the time constraint that we all face these days, it is near to impossible for individual investors to have the requisite expertise. The process is as trying as spotting a needle in a haystack, especially if the investor is unaided.
This is where the need for guidance comes in. To get proper guidance, investors often fall back on the advice of experts while arriving at their investment decision (buy, sell or hold). The experts in the field of investing are brokers.
Why Broker Advice is Crucial?
Brokers not only scrutinize the publicly available financial documents but also attend company conference calls and other presentations. Since brokers arrive at their recommendation (Buy, Sell or Hold) on a stock after thoroughly analyzing the minute details associated with the company, it is natural for investors to be guided by estimate revisions while arriving at investment decisions. Estimate revisions serve as an important pointer regarding the price of a stock. In fact, a rating upgrade normally leads to stock price appreciation and vice versa.
Estimates can move north for a number of reasons – favorable earnings performance, a bullish guidance, product launch or any favorable macro scenario. Similarly, a stock may fall out of analysts’ favor due to adverse events like pipeline failure (for a biotech player). Trimming of earnings estimates by brokers often leads to stock price depreciation. Naturally, investors tend to dump such stocks on the basis of broker advice.
Designing a Winning Portfolio
To take care of the performance with respect to the bottom line, we have designed a screen based on improving analyst recommendation and upward estimate revisions over the last four weeks.
While we have talked about the bottom line in detail, the top line (revenue portion) cannot be ignored. The price/sales ratio has been clubbed with the above criteria as it is a strong complementary valuation metric in the presence of analyst information. 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 top 75 companies that have witnessed net upgrades over the last four 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 four 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 eliminates the ADR and Canadian stocks.
Here are five of the 10 stocks that made it through the screen:
Based in Columbus, OH and founded in 1967, Big Lots, Inc. (BIG - Free Report) is a broad-line closeout retailer in the U.S. The company offers products under various merchandising categories, which include Food, Consumables, Furniture, Seasonal, Soft Home, Hard Home, and Electronics & Accessories.The company has an impressive track with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 81.1%. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Best Buy Co Inc. (BBY - Free Report) : Headquartered in The Richfield, MN, Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. This Zacks Rank #3 (Hold) company has an impressive track record with respect to earnings, having surpassed the Zacks Consensus Estimate in each of the past four quarters by an average of 27.2%.
Diplomat Pharmacy, Inc. (DPLO - Free Report) , headquartered in Flint, MI, focuses on medication management programs for people suffering from complex chronic diseases. The Zacks Consensus Estimate for current-year earnings increased 13.8% over the last 30 days. It carries a Zacks Rank #3.
New York-based Arrow Electronics Inc. (ARW - Free Report) is one of the world’s largest distributors of electronic components and enterprise computing products. It carries a Zacks Rank #3. It has an impressive track with respect to earnings, having surpassed the Zacks Consensus Estimate in three of the past four quarters by an average of 1.2%.
Comstock Resources, Inc. (CRK - Free Report) , headquartered in Frisco, TX, is an oil and gas exploration and production company engaged in exploitation activities of crude resources. This Zacks Rank #3 company delivered a positive earnings surprise of 35.9% in the last reported quarter.
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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